Treasuries Face Uphill Battle After Record High Yield

Treasury yields hit a 24-year high of 5.34% on October 1, sparking some buyers to return to the market. Yields between 5.25% and 5.35% proved attractive for long-term value. However, the big question is whether bonds can rally for a second day.

The last time they managed a two-day rebound was in late August, but it soon fizzled out. Since then, yields have continued to rise, with only one direction in sight.

Markets are now looking at the September payrolls report for clues on whether bonds can rally further. Forecasts point to a solid 90,000 payroll gain, though some analysts expect a range between 35,000 and 180,000. Unemployment is holding steady at 4.1%, but there's still a risk of it falling to 4.0% given the slow growth in the workforce.

Another key number will be average hourly earnings, which should give a sense of cost pressures in the labor market. The ISM factory survey already showed a huge jump in prices paid. Despite this, markets are still expecting a second rate rise from the Fed by the end of the year.

The overnight rally in Treasuries may have been due to the rout in European markets, where France's budget failed to soothe investor angst over its fiscal trajectory. The French-German yield spread blew out past 140 basis points, and investors dumped the euro, causing it to slide 1.3% against the Swiss franc.