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Authored by Ven Ram, Bloomberg cross-asset strategist,

Front-end Treasuries have fallen since Friday’s non-farm payrolls data and Monday’s much-anticipated Senior Loan Office Opinion Survey from the Fed. Still, the increase in yields can only go so far.

While markets were expecting a middling number on the jobs front for April, US employers were still hiring at full speed. Only three of 77 in Bloomberg’s survey had imagined the number would be north of 250k, and coming hot on the heels of the banking turmoil, that expansion was particularly significant. Hourly earnings increased and the unemployment rate extended its decline from a multi-decade low. The Fed reckons that we need a jobless rate of 4.5% to align supply in the economy with demand, but we got a number that went the other way. Clearly, the long tail of the economy will continue to wag.

The SLOOS report proved to be long on excitement, but short on what it ultimately delivered: US lenders tightened their standards in the first quarter, but not by a whole lot. The more interesting read-out showed the weakest demand for credit among large and mid-size firms since 2009.

So it wasn’t a shocker to see two-year yields clawing their way back to 4%, some 20 basis points higher than before the payrolls data.

Even so, front-end Treasuries may find the equilibrium range has moved lower to between 4.00% and 4.20% – and there are enough factors that will support bonds.

President Joe Biden is due to meet Congressional leaders later Tuesday, with Senate Republican leader Mitch McConnell warning that there is no “secret plan” to solve the debt-ceiling impasse.

While we have seen this movie before, the uncertainty will do the economy no good and push it that much closer to a recession.

For now, front-end yields may nudge higher, but there isn’t too much fuel left in the tank.


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