US Treasuries have begun to sell off just after posting their biggest monthly gain in a year, with yields up more than 20 basis points since the beginning of March. Conventional wisdom would suggest that US Treasuries would continue to gain into March after recent macroeconomic events, however the markets are sending conflicting signals.
The escalating conflict with Iran has disrupted shipping through the Strait of Hormuz, driving Brent crude past $100 per barrel. Typically, geopolitical tensions would trigger a flight to safety, with investors flocking to Treasuries and pushing yields lower. However, inflation concerns have overridden this traditional safe-haven dynamic, as markets focus on the inflationary impact of surging energy prices rather than seeking refuge in government bonds.
February's jobs report released on Friday revealed the economy unexpectedly lost 92,000 positions, pushing unemployment to 4.4%, far weaker than the expected gain of 50,000 jobs. A slowing job market may lead the Federal Reserve to consider rate cuts to support economic growth, however yields on 10 year Treasuries were mostly flat on Friday.
The Federal Reserve now faces a difficult choice between cutting rates to support a slowing labor market or hold rates steady in response to higher oil prices. With markets pricing a 97% probability of no rate change at the upcoming March 17-18 FOMC meeting, investors will be watching closely for any shift in the Fed's language around inflation versus employment priorities to have a clearer read on how the Fed will move in the coming months.
Sources: U.S. Bureau of Labor Statistics, CME Group, Bloomberg
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