How fearful is the market of a recession? Oil prices surge, fueling safe-haven buying in U.S. Treasuries. Focus shifts to non-farm payrolls.

As investors turn their attention to the risk that surging energy prices could drag down economic growth, US Treasuries rose again on Thursday in a rare move on a day when oil prices climbed sharply……

Market data showed that Treasury yields across the curve fell collectively overnight. The 2-year Treasury yield dropped 0.06 basis points to 3.796%, the 5-year Treasury yield fell 0.17 basis points to 3.946%, the 10-year Treasury yield slid 1.17 basis points to 4.305%, and the 30-year Treasury yield decreased 1.83 basis points to 4.880%.

The “V-shaped reversal” in Treasury yields during trading on Thursday left many traders chilled to the bone.

Earlier, US President Trump made threatening remarks about Iran in a speech during the Asian session on Thursday, and Treasury yields initially rose along with oil prices. However, the higher oil prices climbed, the more investors worried that this shock could trigger an economic downturn—hurting the stock market and driving money into the bond market. In the end, the 10-year Treasury yield fell by about 1 basis point into the close, even though it had risen as much as 6 to 7 basis points at one point during the session.

From the weekly chart, since the start of this week, the 10-year Treasury yield has fallen by about 13 basis points in total, and is on track to post the largest weekly decline since the week of February 9.

Amerivet Securities’ head of US rates, Gregory Faranello, said that although inflation will rise first, the US Treasury market has already come to terms with the reality that—over time—if energy prices continue to climb or stay at high levels, the economy will be hit.

In a speech delivered in Washington late on Wednesday local time, Trump all but crushed hopes that the Middle East conflict would end quickly, saying the US plans to launch new attacks on Iran within the next two to three weeks, even as he reiterated that the war is “very close” to being completed.

The US benchmark WTI crude oil futures settlement price on Thursday was $111 per barrel, while the US unleaded gasoline daily average retail price earlier this week had already exceeded $4 per gallon. Both marks were the first to reach those levels since 2022.

“Markets earlier appeared to be preparing for a ceasefire statement, but Trump’s remarks delivered the opposite message,” said Molly Brooks, rates strategist at TD Securities.

Focus shifts to nonfarm

Looking ahead, industry participants said that near-term Treasury performance will largely depend on Friday’s US March nonfarm payrolls employment report. Economists surveyed by the media broadly expect that March nonfarm payrolls will add 60,000 jobs, following the prior figure of a decline of 92,000.

Ahead of the nonfarm employment data release, Thursday’s initial jobless claims data showed that the US labor market situation remained relatively stable for the time being. Last week, initial jobless claims unexpectedly fell to 202,000.

Of course, tonight’s nonfarm employment report will be somewhat unusual—the US stock market will be closed for Good Friday. The diversified bond market typically also closes for holidays, but when the holiday coincides with the employment report release day, it is more common to shorten trading hours.

The Securities Industry and Financial Markets Association (SIFMA) currently recommends stopping dollar-denominated bond trading at 12:00 noon New York time on Friday (12:00 a.m. Beijing time on Saturday), which is one hour later than the end time for CME Group interest rate futures trading.

Tom di Galoma, managing director at Mischler Financial Group, said, “This nonfarm data is very likely to be stronger than the bond market’s expectations, and with the four-day Easter long holiday in the UK and Europe coming up, the entire week has been characterized by risk reduction and position unwinds.”

In terms of rate pricing, before the outbreak of the US-Iran conflict on February 28, overnight index swaps (OIS) had priced in the Federal Reserve delivering more than two rate cuts this year (25 basis points each). Those expectations were subsequently wiped out due to concerns about inflation, and traders began pricing in the possibility that the Fed’s next move would be rate hikes. But recently, the market has started pricing again that the Fed may be closer to cutting rates.

The Federal Reserve cut rates three times last year to address weakness in the employment market. They paused rate cuts in January, citing improvements in conditions in the labor market. Since then, the US Department of Labor’s January monthly nonfarm payrolls report beat expectations, while February’s data revealed signs of fatigue—falling into negative territory.

This week, Bank strategists have pushed their estimates for the Fed’s rate-cut window back from June and July to September and October.

(Source: Caixin Finance)