Bond traders buckle up for ‘no landing’ after jobs surprise

(Bloomberg) — The “no landing” scenario – a situation where the US economy keeps growing, inflation reignites and the Federal Reserve has little room to cut interest rates – had largely disappeared as a bond-market talking point in recent months.

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It only took a blowout payrolls report to revive it.

Data showing the fastest job growth in six months, a surprising drop in US unemployment and higher wages sent Treasury yields surging and had investors furiously reversing course on bets for a larger-than-normal half-point interest-rate reduction as soon as next month.

It’s the latest wrenching recalibration for traders who had been setting up for slowing growth, benign inflation and aggressive rate cuts by piling into Fed rate-sensitive short-term US notes. Instead, Friday’s report revived a whole new set of worries around overheating, spoiling the rally in Treasuries that had sent two-year yields to a multiyear low.

“The pain trade was always higher-front end rates due to less rate cuts being priced in,” said George Catrambone, head of fixed income, DWS Americas. “What could happen is the Fed either delivers no more rate cuts, or actually finds itself having to raise rates again.”

Much of the recent market debate had centered on whether the economy would be able to achieve the “soft landing” of deceleration without recession, or veer into the “hard landing” of a severe downturn. The Fed itself had signaled a shift in focus toward preventing a deterioration in the job market after fighting inflation for more than two years, and its pivot to rate cuts began with a half-point bang in September.

But Friday’s payroll report provided ammunition for those who see a disconnect in the Fed cutting rates when stocks are at record high, the economy is expanding at a solid pace and inflation has yet to return to the Fed’s target. In short, a no-landing scenario.

A number of prominent investors and economists, including Stanley Druckenmiller and Mohamed El-Erian, cautioned that the Fed shouldn’t be boxed in by market projections for lower rates or its own projections, with El-Erian warning “inflation is not dead.” Former Treasury Secretary Larry Summers said in a post on X Friday that “no landing” and “hard landing” are risks the Fed has to reckon with, saying last month’s outsized cut was “a mistake.”