Treasuries headed for their biggest drop in more than two weeks after a gauge of private-sector employment growth was in line with estimates, leaving intact expectations that the Federal Reserve will raise interest rates this year.
The 10-year note's yield was nearly five basis points higher on the day at 4.49%, only its second daily increase since May 19. The Treasury market has benefited since then from declining oil prices in anticipation of a Middle East peace accord unlocking supply from the region.
The ADP Research gauge of private-sector job growth in May showed an increase of 122,000, which slightly exceeded economists' median estimate. It was the second of three major US employment gauges this week. April job openings data released Tuesday were stronger than estimated, and the US government's monthly employment report for May — including nonfarm payrolls growth and the unemployment rate — is scheduled for Friday.
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"The ADP report this morning gave further signs to the market of labor stabilization," said Molly Brooks, US rates strategist at TD Securities. While TD expects Friday's jobs data to show sub-par nonfarm payrolls growth, "we would expect the focus to continue to be on inflation and would need a much lower print than we expect to create a sharp reaction from markets," she said.
Treasury options activity during US morning included a large buyer of puts targeting an increase in the 10-year yield to around 4.7% by the end of July.
Yields were already rising before the ADP report as oil benchmarks — which traded at six-week lows on May 29 — rose more than 2% after the US and Iran exchanged fire, damping expectations for a swift end to the conflict.
With the surge in oil prices since the US attacked Iran in late February causing inflation gauges to exceed the Fed's 2% target by a widening margin, employment data need to show weakness to restore the chances of interest-rate cuts this year.
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The combination of persistently high oil prices and labor-market resilience has traders wagering that the Fed's next move will be a hike. Swaps tied to policy-meeting dates carry rates that imply an 85% chance of a quarter-point hike by year-end, up from 60% last week, and an increase is considered certain by January 2027 vs March previously.
The inflation rate targeted by the Fed rose 3.8% year-on-year in April, the fastest pace since 2023. A separate gauge, the consumer price index, also rose 3.8% in April, and is estimated to show an increase of 4.2% in May data to be released next week.
Cleveland Fed President Beth Hammack on Tuesday said the central bank may need to
Several appearances are slated before then, including one at 4 p.m. by Dallas Fed President Lorie Logan, who with Hammack and Minneapolis Fed President Neel Kashkari voted against the Fed's April policy statement because it signaled that that the next move still could be a rate cut.
