- Two-year yield declines after reaching highest since 2010
- Traders point to signs of tame inflation in labor data
Treasuries gained, pushing two-year yields down from the highest since 2010, as U.S. employment data bolstered expectations that the Federal Reserve will raise interest rates from near zero this month and then take its time with additional increases.
Government debt prices initially fell as the Labor Department report showed the U.S. added 211,000 jobs last month, after an increase of 298,000 in October. The median forecast in a Bloomberg survey of economists was for an addition of 200,000 in November.
The data underscored that the economy is strong enough for the Fed to lift borrowing costs from the emergency level in place since 2008. Yet the release also showed wage growth slowing, suggesting inflation is in check and luring investors to Treasuries after a rout Thursday caused yields to soar. Policy makers have signaled for months that the Fed would stick to a gradual pace of rate increases after liftoff.
The figures tell investors that "the Fed won’t go that fast but they’ll still go, so I think the bond market is kind of relieved," said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of the 22 primary dealers that trade with the Fed.
Yields on the benchmark 10-year Treasury fell four basis points, or 0.04 percentage point, to 2.27 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price on the 2.25 percent note due in November 2025 rose 12/32, or $3.75 per $1,000 face amount, to 99 26/32.
The 10-year yield climbed by the most since May on Thursday after European Central Bank policy makers delivered additional stimulus measures that fell short of some forecasts. The decision caused the dollar to tumble versus the euro, raising the specter of quicker inflation. The two-year yield touched the highest since 2010 this week.
With oil prices falling Friday, the inflation concern faded. What’s more, the U.S. labor report showed average hourly earnings rose 0.2 percent in November, half the October pace.
“There were small hints in this report that suggest that inflationary pressures remain very benign," said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “You could interpret from this that the second rate hike will be slow.”
Futures indicate a 74 percent probability of a Fed rate increase by year-end, according to data compiled by Bloomberg. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after the first increase, compared with the current range of zero to 0.25 percent, where it’s been since 2008.
Hedge-fund managers and other large speculators are preparing for a Fed boost. They raised futures bets to a record that five-year notes will fall, according to Commodity Futures Trading Commission data for the week ended Dec. 1.
With tame inflation expectations bolstering the case for a gradual pace of increases, longer-dated Treasuries have outperformed. The yield spread between two- and 30-year securities is about 207 basis points, down from this year’s high of almost 260 basis points, reached in July.
The jobs report “was certainly enough that December is now highly likely as far as the first hike," said Michael Pond, head of global inflation strategy in New York at Barclays Capital Inc., a primary dealer.