WASHINGTON (BLOOMBERG) - Investors who might be looking for the world's biggest bond market to rally back soon from its worst losses in decades appear doomed to disappointment.
The United States employment report on Friday illustrated the momentum of the economy in the face of the Federal Reserve's escalating effort to cool it down, with businesses rapidly adding jobs, pay rising and more Americans entering the workforce.
While Treasury yields slipped as the figures showed a slight easing of wage pressures and an uptick in the jobless rate, the overall picture reinforced speculation the Fed is poised to keep raising interest rates - and hold them there - until the inflation surge recedes.
Swaps traders are pricing in a slightly better-than-even chance that the central bank will continue lifting its benchmark rate by three-quarters of a percentage point on Sept 21 and tighten policy until it hits about 3.8 per cent.
That suggests more downside potential for bond prices because the 10-year Treasury yield has topped out at or above the Fed's peak rate during previous monetary-policy tightening cycles. That yield is at about 3.19 per cent now.
The Treasury market has lost more than 10 per cent in 2022, putting it on pace for its deepest annual loss and first back-to-back yearly declines since at least the early 1970s, according to a Bloomberg index.
A rebound that started in mid-June, fueled by speculation a recession would result in rate cuts next year, has largely been erased as Fed chair Jerome Powell emphasised that he is focused squarely on pulling down inflation.
Two-year Treasury yields on Thursday hit 3.55 per cent, the highest since 2007.
At the same time, short-term real yields - or those adjusted for expected inflation - have risen, signaling a significant tightening of financial conditions.
Mr Rick Rieder, the chief investment officer of global fixed income at BlackRock, the world's biggest asset manager, is among those who think long-term yields may rise further.
The Friday labour report showing a slowdown in payroll growth allowed markets a "sigh of relief", according to Mr Rieder.
He said his company has been buying some short-term fixed-income securities to seize on the large run up in yields, but he thinks those on longer-maturity bonds have further room to increase.
The employment report was the last major look at the job market before this month's meeting of the Federal Open Market Committee.
The upcoming holiday-shortened week has some economic reports set to be released, including surveys of purchasing managers, the Fed's Beige Book glimpse of regional conditions, and weekly figures on unemployment benefits.
US markets will be close Monday for the Labour Day holiday, and the most significant indicator before the Fed meeting will be the consumer price index release on Sept 13.
But the market will parse closely comments from an array of Fed officials set to speak publicly over the coming week, including Cleveland Fed president Loretta Mester.
She said on Wednesday that policymakers should push the Fed funds rate to more than 4 per cent by early next year and indicated that she does not expect rate cuts next year.
Mr Greg Wilensky, head of US fixed income at Janus Henderson, said he is also focused on the upcoming release of wage data from the Atlanta Fed before the next policy-setting meeting.
On Friday, the Labour Department reported that average hourly earnings rose 5.2 per cent in August from a year earlier.
That was slightly less than the 5.3 per cent expected by economists, but it still shows upward pressure on wages from the tight labour market.
"I'm in the 4 per cent to 4.25 per cent camp on the terminal rate," Mr Wilensky said. "People are realising that the Fed won't pause on softer economic data unless inflation weakens dramatically."
"You need to remain humble about your ability to forecast data and how rates will react," said Mr Wilensky, whose core bond funds remain underweight Treasuries. "The worst is over as the market is doing a more reasonable job of pricing in where rates should be. But the big question is what is going on with inflation?"