U.S. treasuries tread water after jobs shock as CPI, auction gauntlet looms

 U.S. Treasuries held their ground on Monday, with benchmark yields pinned near two-month lows as traders caught their breath after Friday’s payrolls blowout and braced for an inflation report and a heavy supply schedule. 

The 10-year yield was flat at 4.859%, the 2-year, the tenor most sensitive to Fed policy, edged up to 4.538%, and the 30-year was little changed at 5.261%.

The 10-year is roughly 40 basis points below where it began October, a rally that was the biggest monthly advance in more than two years. Yields move opposite to prices, so a rally means yields fall.

The jobs shock

On Friday’s, employers added 165,000 jobs in October, nearly triple the 59,000 economists expected, and the unemployment rate slipped to 4.1% from an expected 4.2%.

Yields jumped as much as 6 bps in the 10-year before settling around 4.86%, and the 2-year rose more than 4 bps.

The data collided with a powerful haven bid. A savage tech selloff on Thursday, the Nasdaq 100’s worst day since 2020, had dragged yields lower, and high-yield credit spreads widened.

Friday’s report reversed part of that move by reviving the Fed’s case for tightening. CME’s FedWatch put the odds of a quarter-point hike at the Dec. 8-9 meeting at roughly 77% after the report. The Fed held at 3.75%-4.00% last month in a 10-2 vote, with two policymakers dissenting in favor of a hike.

Why bonds care about CPI

The next test comes Tuesday at 8:30 a.m. ET, when the October consumer price index lands.

Inflation is the single biggest driver of Treasury yields. Hotter prices raise the odds of rate hikes and push yields up, while cooler readings do the opposite.

September’s report showed headline inflation accelerating to 3.7% and core to 2.6%, both above forecasts. Since then, oil has collapsed, with Brent sliding from about $104 to near $91 last week on hopes of an Iran diplomatic deal after the midterms, and markets will look for any sign that this relief is filtering through. Producer prices follow Friday.

A supply stress test

Investors also face a heavy supply week. The Treasury sells $58 billion of 3-year notes today, $42 billion of 10-year notes on Tuesday and $25 billion of 30-year bonds on Thursday.

Wednesday is Veterans Day, so the bond market is closed. The refunding auctions arrive days after the Treasury kept coupon sizes unchanged but dropped “at least” from its guidance that sizes will hold for “the next several quarters.”

Analysts read that as paving the way for larger sales of short- and intermediate-dated debt in 2027 and possible cuts to 20- and 30-year auctions. Treasury also plans up to $70 billion of liquidity buybacks this quarter. Demand at the long end will be a barometer of how the market digests supply with the 10-year near 4.9%.