Bond investors got limited relief from June employment data showing a slowdown in job creation, as robust wage growth helped send 10- and 30-year Treasury yields to their highest levels of the year.
(Bloomberg) — Bond investors got limited relief from June employment data showing a slowdown in job creation, as robust wage growth helped send 10- and 30-year Treasury yields to their highest levels of the year.
A day after two- and five-year rates reached the highest levels since 2007 in anticipation of additional Federal Reserve interest-rate increases, the Treasury market briefly rallied on the news that payroll growth fell short of economist estimates for the first time in more than a year.
Long-maturity yields then resumed rising as investors focused on the report’s stronger-than-expected wage growth. The 10-year note’s yield reached 4.09%, the 30-year bond’s 4.06%. By midday in New York the market had stabilized, leaving yields off session highs.
“The wage growth is still stronger than the Fed would feel comfortable with,” University of Chicago professor and former Fed Governor Randall Kroszner said on Bloomberg Television. “So they are going to say they need to move forward” with more rate increases.
Nonfarm payrolls increased 209,000 after downward revisions in the prior two months, a Bureau of Labor Statistics report showed Friday. Yet average hourly earnings exceeded forecasts, growing at a 4.4% annualized rate.
The report comforted bond investors who jacked up short-maturity Treasury yields Thursday after a gauge of June private-sector payrolls increased more than twice as much as anticipated.
It suggested that while a Fed rate increase in July may be a foregone conclusion, it may prove difficult for the economy to handle.
A July rate increase is expected but “will be a mistake” because inflation is slackening, said Tony Farren, managing director in rates sales and trading at Mischler Financial Group. “The economy and employment are not as strong as the FOMC thinks.”
Any downward pressure on yields Friday may also stem from investors buying at or near the cheapest levels the market has offered lately.
There’s been “dip-buying into the weekend after the policy implications of the data were absorbed,” said Ian Lyngen, head of rate strategy at BMO Capital Markets. “There are some chunky flows going through.”
The divergent performance of short- and long-maturity yields lessened the inversion of the Treasury curve, which earlier this week came within a hairsbreadth of its most extreme level in decades. The margin by which two-year yields exceed 10-year yields — a widely watched metric — shrank to as little as 87 basis points. It nearly reached 111 basis points on July 3.
Traders slightly lowered their estimates of the likelihood of a second Fed rate increase this year to follow a widely expected one in July.
Swaps traders are almost fully pricing in a quarter-point increase on July 26, and about 45% odds of another one by year end, down from around 50% earlier in the week.
After raising its policy rate to a band of 5%-5.25% in May, Fed policy makers opted to leave it unchanged in June, a decision they said was justified by the need to monitor the impact on the economy and banking system of their cumulative action since March 2022.
“It looks like the Fed will go 25 basis points in July after pausing in June,” said Thomas di Galoma, co-head of global rates trading at BTIG.
(Updates yield levels, adds comments.)
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