Treasuries Face Acid Test As Traders Look Past Powell's Pushback

By Ven Ram, Bloomberg Markets Live reporter and strategist

Front-end Treasuries have rallied big in the past month, but labor market data will pose a key test for traders this week.

Yes, Federal Reserve Chair Jerome Powell did reiterate on Friday that the central bank is prepared to tighten policy further, but was just jawboning against the recent loosening of financial conditions rather than a statement of real intent given the clear disinflationary momentum we have seen of late.

The two-year Treasury yield, which was hovering around 5% before softer-than-inflation readings for October, has since shed some 40 basis points. While the decline has made the maturity look rather rich on the curve, some optimism is justified by comments from Governor Christopher Waller who became the first Fed official to explicitly open the door to rate cuts.

As I see it, the two-year maturity has a subjective 60% probability of entrenching its richness, even if the security may only consolidate its gains between now and the year-end. A crucial first test will come as soon as this week, with ADP employment numbers due on Wednesday and non-farm payrolls data for November on Friday. Curiously, the median forecasts on both expect an improvement from prior numbers, but yet another print that shows employers expanded their payrolls for an umpteenth successive time in this cycle isn’t likely to tell the Fed anything that it doesn’t already know about the resilience of the labor market.

Instead, look at the jobless rate, where the number is forecast to stay unchanged at 3.9%. A reading lower than that will puncture the current rally in rates, for that would pretty much rule out any enthusiasm for the sooner-rather-than-later rate cuts that traders have firmly positioned themselves for. The Fed reckons that a print higher than 4% will be required to bring the labor market back into balance. An acceleration in hourly earnings will also sully the bullish mood in the Treasury markets.