Bond traders are convinced the Fed will keep raising rates, and even a cooling in tonight's nonfarm payrolls is unlikely to shake the tightening outlook.

Bond traders are convinced the Fed will keep raising rates, and even a cooling in tonight's nonfarm payrolls is unlikely to shake the tightening outlook. According to a survey of economists, the employment report due Friday from the Labor Department is expected to show that nonfarm payrolls rose by about 90,000 in September, down from 162,000 the prior month. But that gain would be roughly in line with the monthly average so far this year, pointing to a persistently strong job market that gives the central bank room to keep tightening monetary policy the Fed is focused on pushing down inflation that has been above target for the past five years. "You need something close to zero, or even negative and I think you really need a downside surprise in the wage data" to drive Treasuries higher, said Steve Boothe, head of investment-grade bonds and a portfolio manager at T. Rowe Price Group. "The bar is actually quite high for the job market to become a catalyst for this rally." Thursday's selloff in the U.S. bond market eased somewhat, as mounting concerns over Europe's rising debt burden drove investors into Treasuries as a haven, while two Fed officials Michelle Bowman and Philip Jefferson suggested policymakers should take more time before deciding whether further rate hikes are needed. That pushed two-year Treasury yields down about 10 basis points to below 4.8%, and pulled the 10-year yield back from a 24-year high. But analysts said the rebound had little to do with a change in the U.S. outlook, or with any easing of the pressures pushing yields higher. Oil prices are hovering around $100 a barrel, with few signs of progress in ending the war with Iran. Massive federal deficit spending and the artificial-intelligence boom are fueling a steadily expanding economy. And inflation has jumped above 3% this year. Although futures traders slightly trimmed the scale of their rate-hike bets and expect the next increase to come only at the December meeting they still anticipate at least three more quarter-point hikes by July. Still, the magnitude of the recent selloff has made the bond market hard to predict. When U.S. inflation data were released Wednesday, the reading came in slightly softer than expected, and Treasuries briefly rallied before giving up those gains and sending yields back toward multi-decade highs. With positioning increasingly skewed toward higher rates, analysts said a sharp downside surprise in the jobs data could extend Thursday's rally as investors unwind some positions. "If we get a number that the market reads as an early sign of stress in the job market, I think we could see a disproportionate rally relative to an in-line or slightly stronger number," said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets. Still, there is little confidence that the selloff has peaked. Karen Manna, a fixed-income strategist and portfolio manager at Federated Hermes, said she has become less bearish since the Fed raised rates at its Sept. 16 meeting, but she is still not convinced yields have topped out. "A good portion of our thesis about rates rising this high has played out," Manna said. Still, she said, yields "can still go higher."