US bonds fell after jobless claims fell to their lowest level since 2022, one of the last readings on the health of the US labor market before the Federal Reserve's interest rate decision next week.

Yields rose two to four basis points across all tenors, led by the five-year Treasury. The 10-year Treasury yield was just below its session high of around 4.10%.

Labor Department data released Thursday showed that applications for unemployment benefits fell last week to their lowest level in more than three years, signaling that most companies are retaining workers. The day before, ADP Research found that companies shed jobs in November.

These contradictory data points did little to shake traders' expectations that the Fed will cut interest rates for the third consecutive time at its December 10 meeting to support employment. The market is pricing in about a 90% chance that policymakers will cut interest rates to a range of 3.5% to 3.75% and expects further cuts toward 3% throughout 2026.

"As claims approach Thanksgiving week, seasonal adjustments could be very difficult," said Tom di Galoma, managing director at Mischler Financial Group. "The labor market is weakening, led by AI-driven layoffs, which will result in a 25 basis point rate cut by the Fed on December 10th."

Broader indications of labor market weakness—particularly the Labor Department's monthly employment report, which showed a sharp slowdown in job creation since April—prompted Fed policymakers to cut interest rates in September and October.

However, most U.S. government economic data was suspended during the six-week federal funding pause that ended on November 12th, so the October and November employment data that was supposed to be released later this week was scheduled for a delayed release on December 18th.

That leaves policymakers and investors relying on industry data like ADP Research, which on Wednesday showed private sector payrolls declined by 32,000, marking the fourth decline in six months. Consistent with that, Revelio Labs data released on Thursday showed a loss of 9,000 nonfarm payroll jobs in November.

However, with inflation still higher than the Fed's 2% target, some Fed officials have called an October rate cut questionable and argued against a December cut.

"There's no clear path forward for the Fed," said Gennadiy Goldberg, head of interest rate strategy at TD Securities. "With most of the key data due after the December meeting," he expects the Fed to cut rates, but after that, "the path forward remains very unclear."

The central bank's expected policy direction next year is further complicated by President Trump's succession plans for Fed Chairman Jerome Powell, whose term ends in May.

Treasury bond yields hit their lowest level since November last week amid reports that Kevin Hassett has emerged as the favorite, and the result could be further easing next year than anticipated.

While there has been no change in the Fed's likely stance with Hassett starting in May, a calmer attitude has emerged regarding the possibility of reckless rate cuts.

Hassett may not have the clout to convince the majority of the Fed's policymaking committee of his views, Gregory Peters, co-chief investment officer at PGIM Fixed Income and a member of the Treasury's Lending Advisory Committee, said on Bloomberg TV.

"Does he have the credibility within the committee to push for consensus?" Peters asked. "We don't know the answer. I don't think he has that credibility. I think that's what the bond market is saying."

According to a Financial Times report on Wednesday, members of the Lending Advisory Committee raised concerns with the Treasury Department that Hassett would be influenced by Trump, who has been demanding more and larger Fed rate cuts since taking office this year.

Interest rate strategists at HSBC said this week that the 10-year US Treasury yield could rise back to 5%—last seen in 2023, when it peaked near that level—if inflation surges again, "especially if the independence of monetary policy is questioned." Their baseline projection is for the 10-year Treasury yield to rise to around 4.30% by the end of next year. (alg)

Source: Bloomberg