Treasury yields climb to highest since 2002 despite reduced Fed hike expectations

Long-end Treasury yields are poised to challenge higher levels again this week, adding to the persistent strain in the bond market for investors.

Last Friday's weaker-than-anticipated US jobs data was precisely the kind of release that should have eased rate pressure. Non-farm payrolls increased by just 29k, far below the forecast of around 90k, while the unemployment rate inched up to 4.2%. Additionally, wage growth showed signs of cooling.

Initially, the bond market reacted as one might predict. Following the release, 10-year Treasury yields fell sharply, dropping to around 5.16%, as traders reduced expectations for a Fed rate hike in October.

That relief, however, proved fleeting.

Yields reversed the entire decline quickly and have since climbed back above 5.30%. The rapidity of that turnaround, in my view, speaks volumes.

While weak payrolls may alter near-term discussions about the Fed, they were insufficient to persuade investors to retain long-end Treasuries.

Looking at the broader picture, the movement becomes even more notable.

With 10-year Treasury yields now breaking back above 5.30%, they have reached their highest point since 2002.

This is not merely another volatile reaction to a single economic report. It is crucial to understand that the bond market is signalling that a Fed pause does not necessarily mean lower yields.

Traders remain convinced the Fed is unlikely to raise rates in October, with market pricing reflecting only about a 24% chance of a 25 basis point move. That is a significant observation.

The yield increase is not necessarily about the bond market betting on another October rate hike. Rather, it indicates that investors are increasingly hesitant to assume a Fed pause will translate directly into lower borrowing costs further along the curve.

Fiscal concerns and heightened uncertainty over where inflation finally settles remain part of the broader challenge. Meanwhile, heavy Treasury supply and a rising term premium add another dimension, forcing investors to demand greater compensation for holding longer-dated government debt.

For now, the Fed may have more leeway to pause its policy setting. Unless those broader pressures ease, however, the long end of the bond market may continue to do the tightening work.