The follow-up from the payroll report has been decided. The push for higher returns partly reflects an initial reaction to the strong payrolls report, an initial reaction that actually wasn’t all that dramatic. The initial reaction took the 10 years to exceed 4%. The subsequent second wave returned it to the 4.15% area. The local maximum for 2024 was just below 4.2%. It feels good to be back up here, threatening to break that high and working our way towards the 4.25% area. In the area between 4.25% and 4.5% we will start to feel that things have gone too far, and a big catalyst could cause us to fall back below 4%. We simply haven’t reached that tipping point yet.
The decline of New York’s community banks is now behind us and the big declines in the regional bank index have stalled. Until we have a clear view of the material distress occurring in this space, we will reach a point where we effectively ignore the risks, just as we ignore the risks of major geopolitical calamities (until they hit us). It leaves us with two ringing in our ears. First, the payroll report confirmed the maintenance of a strong labor market. Second, a Fed cut in March is no longer possible. These are factors that force yields to rise.
In fact, the next question is whether the Federal Reserve will be able to make cuts in May; that is now a matter of chance from a market perspective. The narrowing of the discount on May rate cuts and the upward trend in the Fed’s funds band correlate with the rise in the 10-year Treasury yield. That can continue at least until something happens to negate it.