Bond traders are betting that the Federal Reserve probably has one more interest-rate hike to go in this tightening cycle as the economy shows resilience — for now at least — despite recent banking turmoil.

Treasury yields advanced in a holiday-shortened session Friday after a drop in US unemployment and stronger-than-anticipated payrolls figures provided support for another quarter-point rate increase at the next Fed meeting in May. Swaps now show the odds of that at more than two-in-three.

Attention will now turn to next week’s consumer price index reading to see whether the Fed is managing to beat back inflation. Concerns about the health of banks and the pace of credit creation will also be uppermost in investors’ minds as they try to assess the prospects for a recession and future yield moves.

Upcoming US inflation data “is the final arbiter as we approach the May Fed meeting, and a consensus or stronger CPI read will challenge the Treasury market,” said Kevin Flanagan, head of fixed income strategy at Wisdom Tree Investments.

The global growth picture will also be in prominent focus in the coming week as the International Monetary Fund prepares to release its latest forecasts and officials from around the world gather in Washington for meetings of the world’s major multilateral economic institutions.

Short-end Treasury yields led the move higher as the amount of extra policy tightening priced by the swaps market in for the next Federal Open Market Committee gathering was boosted to around 19 basis points from the current effective fed funds rate of 4.83%. That suggests a more than two-in-three chance that officials will bolster the benchmark by a quarter point.

The 2-year note’s yield surged as much as 14 basis points to 3.97%, while the 10-year benchmark climbed as much as 7 basis points to 3.38%. The inversion of the curve between 2 and 10 years deepened.

“Across the board strength” in the US jobs report “will boost the chances of a 25-basis-point hike in May. It should push out the timing of cuts as well,” said Priya Misra, global head of rates strategy at TD Securities. “But the market will remain focused on other, less lagging, data and bank earnings.”

The market had been pricing around 14 basis points of May tightening in the lead-up to the jobs report, suggesting a little over a one-in-two chance of a hike.

The market reduced the amount of subsequent policy-rate cuts it expects heading into the back end of 2023, with swaps suggesting a Fed benchmark rate of around 4.36% by the end of December. That figure was close to 4.18% ahead of the labor-market data.

The dollar strengthened against the yen and the euro. US equity-index futures closed up 0.2% in an abbreviated session.

Nonfarm payrolls increased 236,000 — marginally above the median forecast — after an upwardly revised 326,000 advance in February, the Bureau of Labor Statistics said Friday. The unemployment rate fell to 3.5%. Average hourly earnings climbed 4.2% from a year ago, below estimates and the slowest since June 2021.

The consumer price index for March is forecast to show an easing in the annual headline pace to 5.2% from 6%, according to the median estimate of economists surveyed by Bloomberg. In contrast, sticky core pressure is seen with the annual pace edging up to 5.6% from 5.5%. Other key data releases for the coming week include the producer price index and retail sales.

Treasury yields have moved notably lower in the past month on the back of banking system concerns. Turmoil among financial institutions had fueled a bid for the relative safety of Treasuries and forced a rethink about how tight the Fed can keep policy in the face of increased recession risks, even as inflation remains elevated.

“The Treasury market is telling you what direction they would like to go in, and that’s lower yields, but it looks vulnerable to any type of economic numbers that don’t tell us recession is imminent,” said Wisdom Tree’s Flanagan. If inflation readings stay elevated “it will be hard for Treasury yields to sustain their current levels.”

This article was provided by Bloomberg News.