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

The U.S. Treasury market is currently in a state of consolidation, with benchmark yields hovering near two-month lows. This follows a period of significant volatility, particularly after a surprisingly strong jobs report for October. The market is now bracing for a series of critical economic data releases and a substantial influx of new government debt, which together are expected to dictate the near-term direction of bond yields and, by extension, broader financial markets.

The jobs shock

On Friday, the U.S. economy reported a significant 'jobs shock,' with employers adding 165,000 jobs in October, nearly tripling the 59,000 economists had anticipated. Concurrently, the unemployment rate unexpectedly dipped to 4.1% from an expected 4.2%. This robust employment data initially caused bond yields to jump, with the 10-year yield rising as much as 6 basis points before settling around 4.86%, and the 2-year yield increasing by over 4 basis points.

This strong jobs report partially reversed a prior market movement driven by a 'savage tech selloff' on Thursday, which had seen the Nasdaq 100 experience its worst day since 2020 and had dragged yields lower. The renewed strength in the labor market revived the Federal Reserve's case for further monetary tightening, with CME’s FedWatch tool indicating roughly a 77% probability of a quarter-point rate hike at the upcoming December 8-9 meeting, despite the Fed having held rates steady at 3.75%-4.00% in the previous month.

October consumer price index

The next significant test for the bond market is the release of the October Consumer Price Index (CPI) report. Inflation data is considered the single biggest driver of Treasury yields, as hotter-than-expected prices increase the likelihood of further rate hikes by the Fed, thereby pushing yields up. Conversely, cooler inflation readings tend to reduce rate hike expectations and lead to lower yields.

September's report showed headline inflation accelerating to 3.7% and core inflation to 2.6%, both exceeding forecasts. However, since then, the oil market has seen a notable collapse, with Brent crude sliding from approximately $104 to near $91 per barrel last week, partly on hopes of a diplomatic deal with Iran following the midterms. Market participants will be closely scrutinizing the CPI report for any signs that this recent relief in energy prices is beginning to filter through into broader inflation figures, potentially easing pressure on the Fed.

$58 billion of 3-year notes

Investors are also facing a heavy supply week in the Treasury market, which will serve as a crucial stress test for demand. The Treasury is scheduled to sell $58 billion of 3-year notes, followed by $42 billion of 10-year notes, and $25 billion of 30-year bonds. These refunding auctions arrive shortly after the Treasury maintained coupon sizes but removed the 'at least' clause from its guidance regarding future sales, suggesting a potential shift towards larger sales of short- and intermediate-dated debt in 2027, possibly alongside cuts to 20- and 30-year auctions.

Wednesday marks Veterans Day, during which the bond market will be closed, adding to the compressed schedule. The Treasury also plans up to $70 billion in liquidity buybacks this quarter. The demand at the long end of the yield curve, particularly for the 10-year notes near 4.9%, will be a critical barometer of the market's capacity to absorb this substantial new supply amidst ongoing economic uncertainties and evolving monetary policy expectations.