Treasury two-year yields rose as a report showed U.S. job gains in July were close to forecasts, bolstering the Federal Reserve’s position that the economy is strong enough to withstand an interest-rate increase this year.
The 10-year note yield was little changed as the U.S. gained 215,000 jobs, the Labor Department said. That compared with a forecast of 225,000 in a Bloomberg News survey of economists. The jobless rate was unchanged at 5.3 percent.
“It was a solid number across the board,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It’s solid enough, given the Fed’s rhetoric that September should be front and center.”
The two-year note yield rose four basis points, or 0.04 percentage point, to 0.74 percent at 8:55 a.m. New York time, according to Bloomberg bond trader data. The yield on the benchmark 10-year U.S. Treasury note rose by one basis point to 2.23 percent.
Traders are pricing in a 56 percent probability that the Fed will raise interest rates in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. That compares with 48 percent Thursday.
“The Fed can feel more comfortable about removing” its accommodative monetary policies, said Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “The hawks have a better case for the September tightening.”
Schlanger said he has gradually reduced corporate bond holdings and has built up cash to buy bonds at higher yields in the future.
While the employment data also showed a pickup in hours worked, average hourly earnings climbed a less-than-forecast 2.1 percent from a year earlier, indicating little momentum in wage growth.
A drop in inflation expectations to the least in almost five months has complicated the Fed’s drive to raise interest rates before year-end, while a decline in crude-oil prices has spurred demand for Treasuries, limiting any increases in yields.
Treasuries have returned 0.8 percent this year, according to Bloomberg U.S. Treasury Bond Index. Economists and strategists in a Bloomberg News survey expect the 10-year note yield to rise to 2.50 percent by year-end.