Yields rise on strong jobs report

Treasury yields (^FVX, ^TNX, ^TYX) are continuing to rise as the market digests the March jobs report, which came in well above analyst expectations. MassMutual Portfolio Manager Kelly Kowalski joins Market Domination to discuss what this means for future Federal Reserve rate cuts.

Kowalski notes that the jobs report points to growth across both cyclical and non-cyclical sectors. However, she indicates that these strong employment numbers do not create an "urgency for the Fed to begin" cutting interest rates. While the hope for three rate cuts in the latter half of the year may not be "an unfair estimate," Kowalski cautions that this scenario could very well not materialize.

Kowalsk explains that there is more inflation data to be considered before the Fed's next moves. However, she suggests the second or third quarter could potentially see the start of Fed rate cuts, "assuming" the data supports such a decision.

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Editor's note: This article was written by Angel Smith

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JOSH LIPTON: Treasuries come under some pressure as the 10 year yield edges up to 4.37%. But yields hit their highest level of the year early this week with the 10 year topping 4.42%. Joining us now is Kelly Kowalski, Mass Mutual portfolio manager. Kelly, it is good to see you. So let's start with that jobs report. You call it a blowout number. Kelly, were you surprised by the strength you saw there?

KELLY KOWALSKI: Good afternoon. Thanks for having me. Yes, I think we were thinking there may be some slowdown from February. But certainly a strong report, strong revisions which we've been watching. We saw growth across cyclical and non cyclical sectors. So really tells us not a lot of urgency here for the Fed to begin reducing interest rates looking at this report.

JULIE HYMAN: And if that's the case, I mean, I think you think that the markets are perhaps getting the Fed wrong here. In what sense?

KELLY KOWALSKI: Well, they've consistently gotten the Fed wrong, I think for going back several months if we go back just two months ago. There was a certain probability that the Fed was going to begin cutting in March and they've gotten that wrong. I think there is still the hope that we're going to get that three cuts this year. That's probably not unfair estimate. That's certainly possible. But we do see a risk that, we could see less than three cuts this year for sure.

JOSH LIPTON: So I'm thinking about the Fed's rate path less than three Kelly and when do you think they might start cutting?

KELLY KOWALSKI: Well, right now, the base case for the market is June. And there's about a 50% probability. Between now and June, we have two more payroll reports and three CPI reports. So that does give us enough time for them to assess more data. They've told us they're data dependent. So I think our base case is probably second or third quarter that they would want to get that started assuming that we do see a little bit more progress on the inflation front, which is very important.

JULIE HYMAN: And even as the market is pricing in cuts that are still coming, bond yields have been actually rising a bit this week. We saw a couple of weeks ago, a big move upward-- another big move upward this week. So what do you make of that move and how far do you think that can go?

KELLY KOWALSKI: Yeah. We've have seen this consistently repricing. I think the markets have been very reactive to single data points. If you look at the ISM manufacturing. Economic data that we got earlier this week, there was a big reaction to that. And then you had counter reaction with the services PMI. So there's just, I think the markets are a little bit to taking on one data point at a time.

But I think the point is that we came into this year thinking that we were going to get way more cuts than we're probably going to get and we're seeing that correct itself.