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US government bonds made their biggest gains of the year on Wednesday, after weak employment data spurred investor bets on an early interest rate cut from the Federal Reserve.
The two-year US Treasury yield, which is highly sensitive to interest rate expectations, fell to a low of 4.19 per cent ahead of the Fed’s policy announcement later in the day. The drop in yields — which was also felt in longer-dated debt — came after payroll processor ADP reported that US companies added just 107,000 jobs in January, fewer than forecast and down from 158,000 the previous month.
In a further sign of a cooling jobs market, US government figures showed that labour costs rose by the smallest amount since the second quarter of 2021. The labour department’s employment cost index, which tracks wages and benefits paid by private and public-sector employers, rose 0.9 per cent between September and December.
While the Fed is widely expected to keep borrowing costs on hold at between 5.25 and 5.5 per cent later on Wednesday, the signs of a flagging labour market increased expectations of a move at its next meeting.
The probability of a quarter-point interest rate cut by March implied by futures markets rose to 60 per cent, from 40 per cent on Tuesday, according to CME’s FedWatch tool.
In the stock market, the S&P 500 was down 0.8 per cent in mid-day trade and the Nasdaq Composite dropped 1.3 per cent, pulled lower by tech stocks following Tuesday’s weaker than expected growth forecasts from Google parent Alphabet.
Adding to the market jitters ahead of the Fed announcement was a 35 per cent drop in the shares of New York Community Bank after it reported an unexpected loss in the fourth quarter and said it would cut its dividend. The company last year bought failed Signature Bank in a government-assisted deal, and the news on Wednesday resurrected fears of weakness in the regional banking sector.
KBW index of US regional banks was down 0.5 per cent, recovering from a larger drop earlier in the day.
The combination of poor economic data and renewed banking sector worries “has raised the odds of a Fed cut in March”, said Andy Brenner, head of international fixed income at NatAlliance Securities. “Fed days are very, very volatile. Rates are just too darn high.”
Bonds also rallied in Europe. Two-year German yields — a benchmark for the eurozone — were down 0.11 percentage points at 2.42 per cent, extending earlier declines which had come after figures showing lower than expected German inflation.
Also on Wednesday, the Treasury department said it would increase the size of auctions at most maturities for the next three months, with two-year and five-year auctions hitting record sizes. But after three consecutive quarters of increases, the Treasury added that it expected this to be the last increase in auctions of so-called coupons for a while.