Yields jump after ISM rebound, jobs surge add pressure on Fed
Updates prices through late afternoon trading, changes headline, adds FedWatch data
By David Randall
NEW YORK, Feb 3 (Reuters) -U.S. Treasury yields jumped higher on Friday after data that showed job growth surged and services activity rebounded in January, further complicating the Federal Reserve's attempts to slow the economy to bring inflation down.
The yield on 10-year Treasury notes US10YT=RR was up 12.8 basis points to 3.527%, erasing price gains for the week. The yield on the 30-year Treasury bond US30YT=RR was up 6.8 basis points to 3.623%.
The two-year US2YT=RR U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 21.5 basis points at 4.305%, near its high for the year.
Bond prices move in the opposite direction of yields.
"We’ve been saying for a little while that maybe yields have come in too far too soon and that a selloff in rates would make a lot of sense," said Lawrence Gillum, fixed income strategist for LPL Financial. "In the near term it’s hard to see that a recession will be imminent, but it increases the risk of a policy error if the Fed does have to go higher for longer."
Job growth and wages are the chief concerns for the Fed in its attempt to lower inflation down to its 2% target rate after inflation surged to 40-year highs last year. Average hourly earnings rose 0.3% after gaining 0.4% in December, bringing the year-on-year increase in wages to 4.4% from 4.8% the month before.
"Even with stronger-than-expected headline numbers, we saw wage growth come down," said Sam Millette, fixed income strategist for Commonwealth Financial Network.
"There are some signs of a sort of Goldilocks scenario for the Fed here where they aren't seeing the large increase in unemployment that's associated with tighter monetary policy, but they are seeing wage growth starting to slow."
Investors are now pricing in a near-certainty that the Fed raises benchmark rates another 25 basis points in March, according to CME's FedWatch Tool. Markets had previously priced in a roughly 18% chance that the Fed had already concluded its rate hiking cycle before Friday's economic data was released.
Non-farm payrolls surged by 517,000 jobs last month, the Labor Department said. Economists polled by Reuters had forecast payrolls increasing 185,000 and wages advancing 4.3% year-on-year
The unemployment rate fell to 3.4% from December's 3.5%.
The Institute for Supply Management (ISM) said on Friday its non-manufacturing PMI increased to 55.2 last month, above the 50.4 reading expected by economists polled by Reuters. The index dropped to 49.2 in December, falling below the 50 level, which signals contraction, for the first time since May 2020.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=RR, seen as an indicator of economic expectations, was at -78.0 basis points.
February 3 Friday 2:50PM New York / 1950 GMT
Price | Current Yield % | Net Change (bps) | |
Three-month bills US3MT=RR | 4.5425 | 4.6567 | 0.017 |
Six-month bills US6MT=RR | 4.67 | 4.8468 | 0.062 |
Two-year note US2YT=RR | 99-168/256 | 4.3073 | 0.217 |
Three-year note US3YT=RR | 99-192/256 | 3.9652 | 0.201 |
Five-year note US5YT=RR | 99-64/256 | 3.6659 | 0.183 |
Seven-year note US7YT=RR | 99-92/256 | 3.6045 | 0.164 |
10-year note US10YT=RR | 104-224/256 | 3.5302 | 0.132 |
20-year bond US20YT=RR | 103-76/256 | 3.7618 | 0.093 |
30-year bond US30YT=RR | 106-200/256 | 3.6255 | 0.070 |
DOLLAR SWAP SPREADS | |||
Last (bps) | Net Change (bps) | ||
U.S. 2-year dollar swap spread | 26.50 | -1.25 | |
U.S. 3-year dollar swap spread | 15.75 | 0.50 | |
U.S. 5-year dollar swap spread | 7.25 | 0.00 | |
U.S. 10-year dollar swap spread | -1.00 | -0.25 | |
U.S. 30-year dollar swap spread | -36.50 | -1.50 | |
Reporting by David Randall; Editing by Arun Koyyur, Andrea Ricci and Jonathan Oatis
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