Treasuries dropped, pushing 10-year note yields to the highest in two months, after a report showing continued jobs-market strength boosted bets the Federal Reserve may consider raising interest rates sooner than forecast.
Yields on two-year debt climbed to the most since September as the unemployment rate fell to an almost six-year low and employers added more jobs than forecast. Traders pushed the odds up to almost even that Fed Chair Janet Yellen and policy makers will lift borrowing costs by next June. Ten-year yields rose to a 15-year high versus German bunds after the European Central Bank kept interest rates at record lows. The U.S. is scheduled sell $61 billion in notes and bonds next week.
“It’s going to keep the pressure on the Treasury market,” William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland’s RBS Securities unit in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed, said of the jobs report. “The path to higher rates, which we expect in the near term, is going to remain a challenging one just because rates are going to remain low in Europe for a long time and our interest-rate differentials are already pretty wide.”
Benchmark 10-year yields rose one basis point, or 0.01 percentage point, to 2.64 percent as of 2 p.m. in New York after reaching 2.69 percent, the highest since May 2, based on Bloomberg Bond Trader prices. The price of the 2.5 percent note due in May 2024 fell 3/32, or 94 cents per $1,000 face value, to 98 23/32.
Two-year note yields rose three basis points to 0.51 percent after touching 0.52 percent, the highest since Sept. 6.
Treasuries trading closed at 2 p.m. New York time and will stay shut worldwide tomorrow in observance of the U.S. Fourth of July holiday, according to the Securities Industry and Financial Markets Association.
Traders pushed up their bets for a June rate increase to 49 percent from 44 percent yesterday and 33 percent at the end of May, fed funds futures show.
JPMorgan Chase & Co. pulled forward its expectation for when the Fed can boost interest rates to the third quarter of 2015 from the fourth.
“We do expect that Treasury yields in the 10-year sector will migrate toward 3 percent over the second half of the year,” said Jay Barry, an interest-rate strategist with the primary dealer. “That’s predicated on above-trend growth in the second half.”
Treasuries dropped as the addition of 288,000 jobs followed a 224,000 gain the prior month that was bigger than previously estimated, Labor Department figures showed today in Washington. The median forecast in a Bloomberg survey of economists called for a 215,000 advance.
The jobless rate fell to 6.1 percent, the lowest since September 2008. The number of long-term unemployed fell to 3.1 million, showing they’re having greater success finding work.
“The Fed should take notice,” Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “It’s just more evidence that there’s underlying improvement in employment and it’s not quite as dire as Yellen thinks it is. We seem to have definitely turned the corner here.”
Bill Gross, manager of the world’s biggest bond fund, said jobs growth “takes second seat” to stagnant wages. Average hourly earnings rose by 0.2 percent for a second month and increased 2 percent during the past 12 months, which compared with an annualized rate of 2.1 percent last month.
“It’s actually the wage number that is critical,” Gross, the chief investment officer of Pacific Investment Management Co., said in a Bloomberg radio interview. “In order to get to the 2 percent inflation target that the Fed wants to get to, assuming a 1 percent productivity number, you are going to have to see wages at 3 percent plus. So the Fed is willing to stay put here.”
The Fed said after its June 18 meeting that it will keep the benchmark interest rate at almost zero for a “considerable time” after its bond-buying program ends. It reduced monthly debt purchases to $35 billion, its fifth straight $10 billion cut, and said further reductions in “measured steps” are likely.
The personal consumption expenditures price index, the Fed’s preferred inflation gauge, rose to 1.8 percent from a year ago, below the central bank’s 2 percent annual inflation goal. The consumer price index rose 2.1 percent in May above the level a year ago, the biggest jump since October 2012, another report showed June 17.
Yellen told reporters at her June 18 press conference that CPI has “been a bit on the high side,” while adding that the recent “data that we’re seeing is noisy.” She said that inflation broadly speaking “is evolving in line with the committee’s expectations.”
“The market will probably try to pull forward the expectation for rate hikes,” Kathy Jones, a fixed-income strategist at Charles Schwab & Co. in New York. “This is consistent with what they want to see, but it’s not indicating a lot of inflation pressure. So they can sit back and watch this unfold a while longer. I don’t think this pushes them into action.”
The gap between yield on U.S. and German debt widened after ECB President Mario Draghi reiterated that he’ll keep them low as officials try to revive the region’s economy with a new round of emergency measures.
Ten-year Treasuries yielded 135 basis points more than similar-maturity German debt, the widest gap since June 1999, according to closing-price data.
The Treasury Department will auction $27 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds on three days starting July 8. The amount of the three-year sale is down from $28 billion in June, $29 billion in May and $30 billion from October to April.
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