Treasury Curve Steepens as Jobs Data Pulls December Hike Odds to 68%

The Treasury market got the labour-market relief it was positioned for. Two-year yields fell seven basis points on Friday to 3.64%, the largest single-day decline since the September CPI week, while ten-year yields slipped three basis points to around 3.54%. The 2s10s inversion narrowed to roughly nine basis points from about thirteen midweek, a modest bearish-steepening move that is more rally than reflation: the front end did the work as markets trimmed December Fed hike odds from 78% to roughly 68%.

The data behind the move was unambiguous. Nonfarm payrolls rose 125,000 in October against a 140,000 consensus, the slowest pace since April; the unemployment rate ticked up to 4.3% from 4.2%; and average hourly earnings decelerated to 0.2% month over month and 3.5% year over year. For a market that had spent the week pricing a hawkish follow-through to September PCE at 3.1%, the wage number mattered as much as the headline.

The long end moved less, and that reluctance is informative. Ten-year breakevens remain near two-year lows below 2.3% after the October rally, and ten-year TIPS real yields fell only about five basis points, leaving term premium to digest Wednesday's quarterly refunding announcement. Long bonds have already done much of their easing work — ten-year yields are down more than 40 basis points from late September — and investors are reluctant to extend duration until the inflation impulse from Brent's run above $113 shows up in, or misses, the mid-November CPI.

Flows reflected the barbell. Break-even demand stayed firm from real-money accounts betting the oil shock is transitory, while the front end saw fast-money buying on the hike-odds repricing. Foreign demand at auction has been steady but price-sensitive, a constraint that grows as the refunding lands and supplies more duration into a market still debating whether the Fed hikes on December 9-10.

The path forward is data-contingent in both directions. ISM services on Wednesday, November 4 is the next swing — a prices-paid print above 58 would likely push two-year yields back above 3.80% and re-invert the curve — while the November payrolls report on December 4 is the final labour input before the FOMC. For now the curve is pricing exactly what Friday delivered: a Fed that is closer to done tightening than it was a week ago, but not finished.

The week ahead keeps the curve data-locked. Wednesday's refunding sizes set the supply backdrop, five FOMC speakers between Tuesday and Friday will test the 68% December pricing directly, and the ISM services print on November 4 is the last major input before mid-month CPI. Each event is a two-sided risk for a market whose three-week rally has left it vulnerable to any hawkish surprise.