Last Friday's release of the usa non-farm payroll report unexpectedly strong, showing that the usa economy may not be slowing down as expected, and the scenario of 'no landing' once again becomes the focus of the bond market.

The scenario of 'no landing' refers to the continuous growth of the usa economy, with inflation heating up again, leading to a situation where the Federal Reserve has almost no room for rate cuts.

This scenario was once ignored by the bond market in recent months. Traders originally expected the usa economy to slow down and inflation to be moderate, anticipating a significant rate cut by the Federal Reserve. Therefore, they heavily invested in short-term usa government bonds sensitive to changes in Federal Reserve rates.

However, the unexpectedly strong non-farm payroll report in September has raised concerns about the economy overheating, dampening the buying frenzy for us ​bonds, causing the yield on usa bonds to soar from multi-year lows. Pre-market trading on Monday, the usa 10-year treasury notes yield surged back above 4%, and the usa 2-year treasury notes yield broke 4% for the first time since August.

Expectations of rate cuts significantly reduced.

Investors are starting to cut back on their bets on a rate cut in November, expecting the Federal Reserve meeting in November to cut rates by 24 basis points, with a 25 basis point cut no longer a certainty. By October 2025, the market expects a total cut of 150 basis points, below the expected 200 basis points at the end of September.

Meanwhile, apart from wage growth indicating inflation risks, the potential surge in oil prices due to the Middle East conflict has also raised concerns about inflation heating up again. The 10-year breakeven inflation rate (an indicator measuring bond traders' inflation expectations) has reached a two-month high, rebounding from a three-year low in mid-September. This data precedes the PCE inflation data to be released this week.

DWS Americas fixed income director George Catrambone said:

"Due to the reduced expectations for rate cuts, the rise in short-term interest rates has always been a pain point for trading. He pointed out that the possible scenarios are that the Fed either stops cutting interest rates or has to raise them again."

"No landing" expectations heating up

Previously, market discussions mainly focused on whether the economy could achieve "But after the bursting of the internet bubble and the Fed's rate cut in 2001, the ROI dropped by more than 10%."or "hard landing", but the strong performance of the September non-farm payroll report has led some to believe that the Fed's decision to cut rates was inappropriate, especially when U.S. stocks are at historical highs, the economy is expanding at a healthy pace, and inflation has not yet fallen to the Fed's target."

Including Stanley Druckenmiller and Mohamed El-Erian, some famous investors and economists warn that the Fed should not be bound by market expectations for rate cuts or its own expectations. El-Erian warned that "inflation has not yet subsided".

Former Treasury Secretary Larry Summers believes that the Fed needs to consider the risks of "not landing" and "hard landing", and considers last month's significant rate cut a "mistake".

Some also believe that the Fed's significant rate cut last month, combined with China's unexpected stimulus measures, has reduced market concerns about economic growth. Tracy Chen, Brandywine Global's portfolio manager, believes:

"The consideration of a 50 basis point rate cut is now out of the question, as the Fed's accommodative policy and China's stimulative measures increase the possibility of a 'no landing' scenario."

Bloomberg strategist Alyce Andres also pointed out:

"Friday's rise in yields was due to investors rushing to lock in current rates before they rise. Given signs of inflation, labor market stability, and a strong economic momentum, the market may directly face a 'no landing' scenario, rather than a soft landing."

Some investors also believe that the latest employment data is not enough to change the necessity for the Fed to stick to its accommodative policy path, using the opportunity to sell and buy bonds. Jamie Patton, Co-Head of Global Rates at TCW, stated:

"The latest employment data is not enough to change the necessity for the Fed to stick to its accommodative policy path, as overall data including a decrease in the quit rate and increases in auto loan and credit card delinquency rates indicate a softening labor market, with downward economic risks. A single data point cannot change our macro view of a weakening labor market overall."

Patton said she took advantage of the selling opportunity on Friday to buy more two-year and five-year treasury bonds, increasing the steepening position on the curve. She believes that renewed inflation concerns may prevent the Fed from cutting rates, but this would increase the risk of the Fed maintaining borrowing costs too high and for too long, ultimately leading to a more severe economic downturn.

Looking ahead, the market is closely watching this week's CPI report, with core CPI expected to drop from a 0.3% month-on-month increase in September to 0.2%. Current market pricing indicates that a soft landing scenario remains investors' primary forecast. The 10-year break-even inflation rate is 2.2%, still roughly in line with the Fed's 2% inflation target. Swaps markets show that traders expect the Fed to end its easing cycle around 2027 with rates at around 2.9%, consistent with the generally perceived neutral level.