This article is only available to Macro Hive subscribers. Sign-up to receive world-class macro analysis with a daily curated newsletter, podcast, original content from award-winning researchers, cross market strategy, equity insights, trade ideas, crypto flow frameworks, academic paper summaries, explanation and analysis of market-moving events, community investor chat room, and more.
Summary
- US 2-year and 10-year yields have range-traded year-to-date (YTD).
- US yields in both curve points have retraced slightly lower this month after sharp moves higher in February.
- We think the US jobs report tomorrow will be the catalyst for the next directional move in the US rates market, with the next Federal Reserve (Fed) policy update later this month looming large.
Market Implications
- With both US 2-year and 10-year yields currently trading at or near the middle of their YTD ranges, we prefer standing aside for now, as risk/reward considerations present no clear strategy for trade implementation.
US Yields Have Traded in a Range YTD
After falling sharply from mid-October to year-end 2023, the 2-year (-yr) US treasury (UST) yield has traded in a ~60bps range so far this year.
In early January, following that sharp yield drop into year-end, yields initially continued falling, then traded sideways into month-end, before rising in February.
So far this month, the 2-yr UST yield has drifted lower, retracing some of last month’s rise.
Chart 1: Orange Line = 2-Yr UST Yield
Perhaps unsurprisingly, price action in 10-yr USTs has been like that seen in the short-end.
Chart 2: Orange Line = 10-Yr UST Yield
Tomorrow’s Jobs Data Will Set the Tone Into the Fed
The market seems to be waiting for the February jobs report, released tomorrow, after a flurry of buoyant US data last month, to act as a catalyst for the next decisive move in US yields.
The January jobs report, released on 2 February, was much stronger-than-expected across the board, and set the tone for UST price action throughout last month.
The headline reading (353,000) was much higher than consensus, with the unemployment rate (3.7%) lower than expected.
Most importantly, average hourly earnings (AHE), both MoM (0.6%) and YoY (4.5%), were considerably higher than expected.
As a result, tomorrow’s data release is more important than usual, given the outsized prints last month.
While the headline reading is expected to moderate (200,000) from the previous very strong level (with strong potential for a downward revision to previous data), the AHE readings will again be key for the next moves in US bond yields.
The expectation is for the MoM reading to come in at 0.2%, with the YoY expected to be 4.3%.
We Are Cautious Ahead of the US Jobs Report
With so much riding on tomorrow’s data, we prefer standing aside for now and let price action guide our next moves in the market.
This is especially true given that both 2-yr and 10-yr UST yields are either at or near the middle of their YTD ranges.
When this happens, it is challenging to fashion sensible risk/reward trade strategies.
The February jobs report may see the YTD ranges challenged, and we may see potential breakouts from those ranges.
Before then, however, our approach is cautious.