Treasury Yields Set for Weekly Advance Before U.S. Payrolls Data

  • Labor market scrutinized for clues to pace of Fed tightening
  • U.S. two-year debt yield climbs to highest level since 2010

Yields on two-year Treasuries were set for their third weekly advance before a U.S. payrolls report watched by investors for clues on this month’s interest-rate decision.

With markets pricing in a high probability the Federal Reserve will tighten policy for the first time since 2006, declines in shorter-dated Treasuries Thursday sent two-year yields to a more-than five year high. U.S. employers added 200,000 jobs, according to the median forecast in a Bloomberg survey of analysts.

“We expect another solid rise in payrolls cementing the case for a modest rate hike in the December meeting,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. Policy makers meet Dec. 15-16.

The two-year note yield was at 0.96 percent as of 7:02 a.m. New York time, set to gain four basis points, or 0.04 percentage point, this week after an advance of eight basis points in the two weeks ending Nov. 27, according to Bloomberg Bond Trader data. The yield reached 0.99 percent on Thursday, its highest since May 2010. The price of the 0.875 percent security due in November 2017 was little changed at 99 27/32.

The benchmark U.S. 10-year note yield was set to gain nine basis points, its first weekly advance since Nov. 6. On the day, it was little changed at 2.31 percent.

Labor Markets

Fed chair Janet Yellen delivered a cautiously optimistic outlook for the U.S. economy on Thursday. She signaled an interest rate rise in December but also that future moves would be gradual.

“The question for the market now is how fast the Fed’s going to tighten,” Stamenkovic said. “If we see signs that wage pressures are building up then the market might expect the Fed to tighten more aggressively and that will put pressure on the short end,” he said, referring to shorter-dated notes.

Stamenkovic predicts two-year yields will reach 1.20 percent by the end of the first quarter.

Futures trading indicates 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 liftoff, compared with the current range of zero to 0.25 percent, where it’s been since 2008.

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