Hi YXI friends,

On Friday, a big Nonfarm Payrolls report was released, blowing away all analysts expectations. This followed the FOMC minutes from Wednesday, which indicated that the Fed is more worried about high inflation than a weak job market in 2025.

Given the strong labour market data, bonds continued to sell off as yields climbed above their April 2024 highs. Since the September FOMC, in which the Fed cut 50bp in the Fed Funds rate, the 10-year yield has now increased by over 1%.

It’s not just the absolute levels of bond yields that are frightening for the investors, but also the pace of moves. A fast rising 10-year yield creates drastically tighter financial conditions for borrowing and mortgages, not to mention the losses that current bond holders are suffering at the big banks. XLF, the Financials ETF, dropped by 2.5%, a near 3-standard-deviation daily move.

Meanwhile, SPY dropped by nearly 2 standard deviations from its one year daily moves. TLT traded at a fresh low since 2024, at $85.16.

Are bond holders doomed? Will yields move past their 2023 peak?

Below, I will walk through the nonfarm payrolls data, the FOMC projections, SOFR and bond yield curves, as well as an analysis of the 30-year Treasury yield and the TLT. I map out the key price levels to watch and the not-so-small chance of the 30-year UST yield rising above 6%.

Table of Contents

• 1. Nonfarm Payrolls Beat Expectations - Or Did The …

  • The dark art of Nonfarm Payrolls calculations

  • Employment Change By Industry

• 2. Market Unsure About Timing Of Next Cut

• 3. Yield Curves Higher 3 Years Forward

• 4. Inflation Concerns Driven By Both Policy And Oi …

• 5. 10-Year Term Premium Rising Quickly

• 6. Will The 30Y Treasury Yield Reach 6%?

  • Primary Expectation Vs. Alternative

• 7. TLT Needs Reversing Soon

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. Nonfarm Payrolls Beat Expectations - Or Did They?

The dark art of Nonfarm Payrolls calculations

US Nonfarm Payrolls appeared to have added 256k net new jobs in December, a huge beat to the consensus of 164k.

Moreover, Unemployment Rate dropped to 4.1%, a nice move away from the FOMC’s own year-end projection of 4.2%.

Overall the labour market looks very strong, and would not justify an immediate cut from the Fed, who have recently shifted their focus back to the sticky inflation.

However, there was some massaging of data too, hidden in the “seasonal adjustment factor”.

The table above, taken from the Nonfarm Payrolls release, shows that “Not seasonally adjusted” Nonfarm Payrolls showed a total nonfarm figures of 160.458 million. After applying a seasonal adjustment factor, the “Seasonally adjusted” total nonfarm figure became 159.536 million jobs. The seasonal adjustment compensates for the seasonal hiring in the original data (e.g. if more people are usually hired in December for certain seasonal jobs).

In December 2024, the seasonal adjustment factor was 0.99425.

What’s the issue? This figure is historically high for Decembers.

In December 2023, the seasonal adjustment factor was just 157232/158228 = 0.9937.

If we applied the same seasonal adjustment factor of 0.9937 to the latest December 2024 unadjusted figures, we get 159.447 million total nonfarm jobs instead. This is an increase of…167k net new jobs added from November 2023, bang on the consensus estimate.

Cheeky right? Now you understand the dark art of Nonfarm Payrolls calculations.

Back to the big picture.

Whether we added 167k jobs or 256k jobs in December, the current labour market would not warrant the sort of panic cutting that the Fed did in September. Having three 200k+ months out of the past four is pretty impressive. Given the GDP is largely a function of productivity and total work hours, a string of strong job report signals we are nowhere near a recession.

Hourly earnings slowed a touched YoY to 3.9%. I actually like this, because it reduces the chance of continued sticky core inflation.

Higher wages can pressure businesses to pass rising costs onto customers and historically have a high correlation with core inflation readings in the same month.

Employment Change By Industry

In December, job gains were fairly broad-based lead by Healthcare, Retail trade, Leisure, and Government. Apart from Retail trade, the other three sectors match the same pattern we saw in November.

2. Market Unsure About Timing Of Next Cut

We have known for a while that the Fed plans to pause its cutting in January. Even the December meeting was actually quite close. However, before the Nonfarm Payrolls, there had been an expectation for the next cut to be in March or May.

However, after Friday, the market is no longer sure when the next cut will be. The Fed Funds futures market now spreads its bet across the 6 meetings between March and November 2025.

Furthermore, only 30bp of cuts are projected for the entire year, shallower than the latest FOMC Dot Plot.

I have not seen the Fed Funds levels being spread out like this for a while. It is suggesting that the timing of next cut is now entirely dependent on which set of monthly CPI/ PCE will show inflation moving towards the 2% target again.

Bank of America no longer expects any cuts at all this year, highlighting the risk of a hike instead. If we are back to a hiking cycle already, which is a bold call, bonds are still richly priced.

3. Yield Curves Higher 3 Years Forward

Compared with last week, SOFR yields rose across the curve, but most steeply in the 3-year region. This signals investors expectation of the Fed being close to finishing the cutting cycle and hikes are likely coming in 2026 and beyond.

The US Treasury yields are now in a “normal shape” across the curve, as opposed to being “inverted”.

There is a big jump in the forward yields starting 7 years, likely due to investors pricing in additional term premium for holding longer term bonds. (More on this below.)

4. Inflation Concerns Driven By Both Policy And Oil

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