Yields rebound after hitting two-month lows in wake of weak jobs report



(Recasts, updates yields)

By Karen Pierog

CHICAGO, May 7 (Reuters) - U.S. Treasury yields rebounded after hitting two-month lows on Friday following data that showed a much smaller-than-expected jobs gain in April, with yields on longer-dated debt rising for the session as investors remained confident the economy was on the road to a strong recovery.

The benchmark 10-year yield US10YT=RR , which dropped to 1.469%, the lowest since March 4, was last up 1.6 basis points on the day at 1.5771%, holding below a 14-month high of 1.776% reached on March 30.

The 30-year yield US30YT=RR tumbled to its lowest level since March 1 at 2.158%. It was last 4.4 basis points higher at 2.28%.

Nonfarm payrolls increased by only 266,000 jobs last month after rising by 770,000 in March, the Labor Department reported. Economists polled by Reuters had forecast payrolls advancing by 978,000 jobs. The unexpected slowdown in job growth was likely due to shortages of workers and raw materials as the economy recovers from the coronavirus pandemic.

The yield drop was a "knee-jerk reaction" that faded as the session wore on and the market digested the data, according to analysts.

"Despite a huge miss, which it was, it's still employment going in the right direction," said Andrew Richman, senior fixed income strategist at Sterling Capital Management.

John Canavan, lead analyst at Oxford Economics, said the report reinforced the idea the Federal Reserve can stick with its current monetary policy for longer, which led to intermediate yields outperforming longer-dated yields, steepening the yield curve between five-year notes and 30-year bonds US5US30=RR . It was last 6.87 basis points steeper at 150.60 basis points.

"As market participants pile into curve-steepening trades, part of that results in selling of the long end," Canavan said.

The most closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes US2US10=RR was about 2 basis points steeper at 143.20 basis points.

U.S. interest rate futures indicated that traders pushed out expectations of a Fed rate hike by roughly three months after the payrolls report's release.

Eurodollar futures, which are 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.

Inflation expectations temporarily eased in the wake of the jobs data, with the breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=RR falling as low as 2.586% from 2.661% at the previous close. It was last at 2.678%, down from a 10-year high of 2.696% reached on Wednesday.

The 10-year TIPS breakeven rate US10YTIP=RR also rebounded after falling to 2.411%. It rose to 2.503%, the highest since April 2013, indicating the market sees inflation averaging 2.5% a year for the next decade.

"The Fed's being extremely easy here still. We have stimulus coming on. It's inflationary in the short run," Richman said.

The two-year Treasury yield US2YT=RR , which typically moves in step with interest rate expectations, was last 1 basis point lower at 0.1468%.

Next week will bring a burst of supply, with the U.S. Treasury auctioning $58 billion of three-year notes on Tuesday, $41 billion of 10-year notes on Wednesday, and $27 billion of 30-year bonds on Thursday. May 7 Friday 4:23PM New York / 2023 GMT

Price

Current Net

Yield % Change

(bps) Three-month bills US3MT=RR 0.015

0.0152

0.000 Six-month bills US6MT=RR

0.035

0.0355

-0.005 Two-year note US2YT=RR

99-245/256 0.1468

-0.010 Three-year note US3YT=RR

100-64/256 0.2893

-0.022 Five-year note US5YT=RR

99-228/256 0.7725

-0.024 Seven-year note US7YT=RR

100-24/256 1.2359

-0.007 10-year note US10YT=RR

95-236/256 1.5771

0.016 20-year bond US20YT=RR

95-108/256 2.1607

0.034 30-year bond US30YT=RR

91-72/256

2.28

0.044

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap

10.25

-0.50

spread

U.S. 3-year dollar swap

13.00

-0.75

spread

U.S. 5-year dollar swap

9.25

-0.50

spread

U.S. 10-year dollar swap

-2.00

-0.50

spread

U.S. 30-year dollar swap

-28.50

-1.50

spread


By Karen Pierog; additional reporting by Ann Saphir and Kate Duguid Editing by Sonya Hepinstall

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