TREASURIES Markets’s pullback on Fed rates adds fuel to bets

The US economic data added fuel to traders bets on how high Federal Reserve interest rates might go, as Bloomberg Treasuries sold off as stronger than expected.

The US debt markets' pullback drove yields up by 10 basis points, with the 10 year rate jumping to 3.58%. The market indicated that a peak of close to 5% in the middle of 2023 was seen by Swaps in the expectation of where the Fed terminal rate will be. The dollar went up while the US stocks lost ground.

The Treasury market was under pressure on Monday due to the numbers on services and factory orders that showed a healthier economic picture, and the move was extended on the back of those figures. Yields remained within their range from Friday, when a robust jobs report prompted a surge in yields that then faded out by the end of the day.

Monday s moves received a major boost from a new reading of the Institute for Supply Management's services gauge, which unexpectedly rose to 56.5 in November from 54.4 the month before. The business activity measure was the biggest increase since March 2021, suggesting that the largest part of the US economy remains resilient.

Tony Farren, managing director of rates sales and trading at Mischler Financial Group, said that was a hard number to argue with. The long end of the Treasury market has been saying that the economy is going to roll over. This takes away one of the pieces of ammo for the long end to say that the economy is weak despite employment. Markets could continue to be choppy as the end of the year approaches and along with it the final Fed meeting of 2022 on December 13 -- 14 Markets continue to price a half-point increase for that gathering, little changed from before the most recent data, which would represent a slowing of the pace of tightening. The Fed boosted rates by 75 basis points at its last meeting.

The central bank is in the traditional pre-meeting blackout period and unable to give any further guidance, so investors are likely to be more focused on data releases, including next week's consumer-price inflation report.

On top of that, liquidity is typically less ample heading into the final holiday-affected stretch of the year, which means there is scope for smaller transactions to spur large moves.

There is a big role in exacerbating swings and each data release has an outsized influence on such an environment, said Lindsay Rosner, a portfolio manager at PGIM. The jobs number was strong and that makes people nervous. The year end is an impact of tax loss harvesting and positioning for next year. The trend for the economy and Fed policy is going to continue into next year and everyone is trying to figure out what is going to happen.