(Bloomberg) — To kick off the second quarter, bond traders will look to a fresh reading on the job market to gauge which Federal Reserve speaker has the best grip on the U.S. economy.
Ten-year yields ended last week near the lowest levels of March, after gaining Friday when New York Fed President William Dudley said three rate hikes in 2017 is a “reasonable” projection and the economy isn’t overheating. The Boston Fed’s Eric Rosengren voiced the risk of running too hot two days earlier. He said four rate increases in 2017 could be warranted, and the San Francisco Fed’s John Williams also didn’t rule out four.
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The bond market sided with Dudley, amid growing skepticism about the reflation trade. A market-based gauge of inflation expectations isn’t far above its 2017 low, and economic data surprises, which peaked just in time for the central bank’s March hike, are retreating from the highest levels since 2014, Citigroup Inc. data show.
“The Treasury market is taking a more cautious view and just saying, ‘Prove it to me,”’ said John Bredemus, an investment strategist for Allianz Investment Management, which oversees $700 billion. “There’s a lot of promise out there, and we’ve been disappointed often in the last few years around inflation moving up and justifying higher rates.”
The proof may come this week when the Labor Department releases March payrolls data. The median forecast in a Bloomberg survey is for an addition of 175,000 jobs.
With recently monthly job gains exceeding 200,000, Treasuries face an “asymmetry of risks” going into the report, BMO Capital Markets strategists Ian Lyngen and Aaron Kohli wrote Friday in a note. A disappointing result will spur a larger drop in yields than an above-consensus number will increase them, they said.
The 10-year Treasury yields about 2.39%, after fluctuating in a range of 2.3% to 2.63% last quarter.