After unexpectedly strong non-farm data, bond traders are preparing for the scenario of the U.S. economy not "landing."

The unexpectedly strong US non-farm payroll report released last Friday indicates that the US economy may not be slowing down as expected, and the "no landing" scenario has once again become the focus of the bond market. The "no landing" scenario refers to the continuous growth of the US economy, with inflation rising again, leading to a situation where the Federal Reserve has almost no room to cut interest rates. This scenario was ignored by the bond market in recent months, as traders originally expected the US economy to slow down and inflation to remain moderate, anticipating that the Federal Reserve would cut interest rates significantly. Therefore, they heavily invested in short-term US government bonds sensitive to changes in Federal Reserve rates. However, the unexpectedly strong September non-farm payroll report has raised concerns about the economy overheating, dampening the buying frenzy for US bonds. This has caused US bond yields to soar from multi-year lows, with the US 10-year Treasury yield surpassing 4% before the Monday stock market opening, and the US 2-year Treasury yield breaking 4% for the first time since August. Expectations of Rate Cuts Reduced Significantly Investors have started to reduce bets on a rate cut in November, with expectations that the November Federal Reserve meeting may cut rates by 24 basis points, making a 25 basis point cut no longer certain. By October 2025, the market expects a total cut of 150 basis points, lower than the 200 basis points expected at the end of September. Meanwhile, in addition to inflation risks hidden behind wage growth, concerns about inflation have risen again due to the possibility of oil price spikes caused by the Middle East conflict. 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. George Catrambone, Head of Fixed Income for DWS Americas, stated: "Due to the reduced expectations for rate cuts, the rise in short-term rates has been a pain point for trading. The possible scenario is that the Federal Reserve either stops cutting rates or has to raise rates again." Rising Expectations of "No Landing" Previously, market discussions mainly focused on whether the economy could achieve a "soft landing" or a "hard landing". The strong performance of the September non-farm payroll report has led some to believe that the Federal Reserve's rate cut decision was inappropriate, especially when the US stock market is at historical highs, the economy is expanding at a steady pace, and inflation has not yet fallen to the Fed's target. Some prominent investors and economists, including Stanley Druckenmiller and Mohamed El-Erian, have warned that the Federal Reserve should not be bound by market expectations for rate cuts or its own expectations. El-Erian warned that "inflation has not subsided". Former Treasury Secretary Larry Summers believes that the Federal Reserve needs to consider the risks of "no landing" and "hard landing", and considers last month's significant rate cut to be a "mistake". Some believe that the Federal Reserve's significant rate cut last month, coupled with China's unexpected stimulus measures, has reduced market concerns about economic growth. Tracy Chen, Portfolio Manager at Brandywine Global, believes: "A 50 basis point rate cut should no longer be considered now, as the Fed's accommodative policy and China's stimulus measures have increased the possibility of the 'no landing' scenario Bloomberg strategist Alyce Andres also pointed out: "The rise in yields last Friday was because investors were eager to lock in current rates before the rate hike. Given signs of inflation, a stable labor market, and a strong economic momentum, the market may directly face a scenario of 'no landing' rather than a soft landing." Some investors also believe that the latest employment data is not enough to change the necessity for the Federal Reserve to stick to its accommodative policy path, using the selling opportunity to buy government bonds. Jamie Patton, Co-Head of Global Rates at TCW, stated: "The latest employment data is not enough to change the necessity for the Federal Reserve to stick to its accommodative policy path, as overall data including a decrease in quit rates and an increase in auto loan and credit card delinquency rates indicate softness in the job market, posing downside risks to the economy. One data point cannot change our macro view of overall weakness in the labor market." Patton mentioned that she used the selling opportunity on Friday to buy more two-year and five-year government bonds, increasing her steepening position on the curve. She believes that rekindled 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, potentially leading to a more severe economic downturn. Looking ahead, the market is closely watching this week's CPI report, with core CPI expected to decrease from a 0.3% month-on-month increase in September to 0.2%. Current market pricing indicates that a soft landing scenario remains the basic prediction for investors. The 10-year breakeven inflation rate is at 2.2%, still broadly in line with the Fed's 2% inflation target. The swap market shows that traders expect the Fed to end its accommodative cycle around 2027 with rates around 2.9%, consistent with the commonly believed neutral level