Treasuries gained after a report showed the U.S. added fewer jobs than forecast and wages stagnated in June, driving futures traders to push back the projected timing for the Federal Reserve to raise interest rates.
Yields fell for the first time in three days after average hourly earnings at private employers grew last month at a slower rate than anticipated, a Labor Department report showed. Traders have been eyeing wage growth as a key indicator of when the Fed will deem the economy strong enough to raise rates for the first time since 2006.
“The market is reacting to the flat wage growth,” said Jennifer Vail, head of fixed income research at U.S. Bank Wealth Management, which manages $128 billion in assets. “The Fed is on a path to liftoff with a shallow and gradual rise in the rate.”
Vail said Treasuries are expensive and that she expects the 10-year yield to rise to 2.75 percent by year-end. She prefers high-yield securities and dollar-denominated emerging market debt.
The yield of the benchmark 10-year U.S. Treasury note fell four basis points, or 0.04 percentage point, to 2.38 percent at 4:59 p.m. New York time, according to Bloomberg bond trader data. It touched 2.46 percent before the jobs report.
The 2.125 percent note due in May 2025 gained 11/32, or $3.44 per $1,000 face amount, to 97 3/4.
“The economy is definitely doing better, but not booming either,” said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities Inc. in New York. “The data were mediocre and likely pushed the probability of Fed hikes further out into the future.”
Fed funds futures show a 29 percent chance the central bank will lift its benchmark rate from near zero in September, down from 35 percent Wednesday, and a 67 percent chance by December, down from 72 percent, according to data compiled by Bloomberg.
The U.S. economy added 223,000 jobs last month, less than the 233,000 forecast by economists surveyed by Bloomberg. Average hourly wages increased 2 percent over the 12 months ended in June, following a 2.3 percent gain the prior month.
“There’s nothing in this number that gives the Fed urgency to raise rates in September,” said Gene Tannuzzo, a Minneapolis-based money manager at Columbia Threadneedle Investments, which oversees $506 billion. “It’s a coin toss between September and December, but I feel confident it will be this year.”
Tannuzzo said he likes investment-grade corporate bonds and that mortgage-backed securities are modestly attractive.
“Many people were looking for a pick-up in average hourly earnings and they didn’t get it,” said Thomas Di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “We’re seeing this lack of inflation generally.”
The jobless rate fell to a seven-year low of 5.3 percent as more people left the labor force.
“People are really focused on the wage figure,” said Thomas Graff, who manages $3.6 billion of fixed-income assets at Brown Advisory Inc. in Baltimore. “If you look at all the numbers together, it paints a picture of continued steady improvement.”
The Treasury gains come as German bunds fell as Greece remains deadlocked with its creditors. Yanis Varoufakis said Greece won’t “extend and pretend” that it can pay its debts and vowed to quit as finance minister if voters don’t support him in a July 5 referendum.
The Bloomberg U.S. Treasury Bond Index declined 2 percent in the last quarter, its first loss since the last three months of 2013. It fell 1 percent in June, the worst monthly performance since February.
Economists and strategists in a Bloomberg News survey expect the 10-year note yield to rise to 2.58 percent by year-end as the economy strengthens.
“The Fed has the ammunition if they want to to pull the trigger and tighten in September, and I think they want to, but the number this morning causes a little concern,” said Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “There don’t seem to be any wage pressures at this point.”