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U.S. interest rate futures on Friday showed that traders pushed out expectations of a rate hike by roughly three months after Friday morning’s payrolls report. Eurodollar futures, a proxy for interest rate expectations, showed a 90% chance of an interest rate hike in March 2023, and fully priced in a hike in June 2023. Prior to the report, investors were betting there was a 90% chance of a hike in December 2022 and a 100% chance in March 2023.

The change in interest rate expectations brings the market more in line with the Fed’s dovish approach to the coronavirus pandemic recovery. Though economic data has been improving, the Fed has said it has no plans to raise rates until maximum employment is achieved. April’s employment growth came in far short of expectations, probably restrained by a shortage of workers and raw materials even as demand improved rapidly. It would be hard to argue it stands as “substantial further progress” toward maximum employment, the test the Fed has said it must achieve before it begins dialling back its massive support for the economy.

Following April’s meeting, investors were betting the Fed would raise rates in late 2022 or early 2023 and would offer clues about tapering its $120 million in monthly asset purchases as soon as June 2021.The push back in expectations for when the Fed might start raising rates also means any reduction in the pace of its bond buying - which the Fed has said will begin first - may also occur later than some investors had been betting. However, Investors still see the Fed needing to lay out a roadmap to tapering or at least beginning to lay out a plan for asset purchase tapering.

Commodity Futures Trading Commission data released on Friday showed that speculative positioning in U.S. 10-year Treasury futures flipped from a net long of 55,759 contracts to a net short of minus 7,245 contracts in the week through May 4.

Shorter-dated Treasury yields, which move with expectations of interest rates, fell in the wake of the report. The two-year yield, dropped to its lowest level since March, before recovering somewhat, last down 1 basis points to 0.147%.

Yields at the long end of the Treasury curve initially fell following the report, but quickly recovered. The 10-year yield, after hitting the lowest level since March 4, retraced the move to last trade at 1.579%, flat on the day.

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