10-year Treasury yield back above 4% on signs of tight U.S. labor market

What’s happening

• The yield on the 2-year Treasury
  TMUBMUSD02Y,
  4.907%
  rose 2.6 basis points to 4.9% from 4.874% on Monday.

• The yield on the 10-year Treasury
  TMUBMUSD10Y,
  4.048%
  jumped 8.3 basis points to 4.039% from 3.956% Monday afternoon.

• The yield on the 30-year Treasury
  TMUBMUSD30Y,
  4.098%
  advanced 7 basis points to 4.086% from 4.016% late Monday.

What’s driving markets

Data released on Tuesday showed that U.S. job openings were little changed at around 9.6 million in June, and that the number of workers who quit in June decreased to 3.8 million from 4 million in May — signaling that the labor market remains quite tight.

A strong jobs market is seen as likely to contribute to inflationary pressures and put pressure on the policy-setting Federal Reserve to keep interest rates elevated. More U.S. labor-related data is expected to arrive over the next few days, including Wednesday’s ADP private-sector jobs report for July, weekly initial unemployment claims on Thursday, and July’s nonfarm payrolls report on Friday.

In other data released on Tuesday, S&P Global’s final U.S. manufacturing purchasing managers’ index reading for July came in at 49.0, the same as the initial reading. The ISM manufacturing index rose to 46.4% in July from 46% previously, yet indicated that manufacturers remain mired in a slump. And construction spending was up 0.5% in June after a revised 1.1% gain in the prior month.

Markets are pricing in a 79.5% probability that the policy-setting Federal Open Market Committee will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 31.2%.

The central bank is most expected to take its fed funds rate target back down to around 5% or lower by next May.

What analysts are saying

“Our base case scenario for the next few weeks is that the debate will shift beyond whether the FOMC will pause in September as the data provides confirmation of the merits of skipping the next meeting,” said BMO Capital Markets strategists Ian Lyngen and Ben Jeffery. “This dynamic will put November 1 into focus and in doing so serve as a reminder that there is a lot of data between now and the final two Fed decisions of the year.”

“Translating this into any meaningful direction for U.S. rates is complicated by the trajectory of the global economy and building concerns that while the U.S. economy might be on strong enough footing to endure elevated policy rates for an extended period of time other regions will prove more vulnerable,” they said in a note.