Treasuries Decline as U.S. Employment Growth Surges in December

  • Gain of 292,000 jobs follows upward November revision
  • Wage growth trails forecasts as jobless rate holds at 5%

Treasuries fell after a report showed unexpected U.S. labor market strength, bolstering the case for the Federal Reserve to raise interest rates further this year.

Yields rose after the Labor Department said the nation gained 292,000 jobs last month, following an increase of 252,000 in November. The median forecast in a Bloomberg News survey of economists was for an addition of 200,000 jobs in December. Treasuries pared losses as investors focused on wage growth that rose less than forecast from a year earlier.

The Fed lifted its target rate by 0.25 percentage point in December after holding it near zero for seven years, and policy makers forecast four more increases this year. Interest-rate derivatives traders expect only about two increases in 2016 as investors question whether the Fed will be able to tighten policy amid low inflation, economic weakness abroad and resurgent financial-market volatility emanating from China.

“It’s a pretty stellar report,” said New York-based Peter Tchir, head of macro strategy at Brean Capital LLC. “The only thing that is missing is the wage growth, but that is something the Fed can largely assume will come at some future point. This keeps the Fed on their pace toward tightening next in March.”

The yield on the benchmark 10-year Treasury rose two basis points, or 0.02 percentage point, to 2.16 percent at 9:07 a.m. in New York, according to Bloomberg Bond Trader data.

Inflation Concern

U.S. government securities declined for the first time in seven days after China’s currency fixing Friday suggested the nation’s measures to spur the economy this week may be starting to have the desired effect, curbing demand for the safest assets.

Yields remained higher after the Labor Department report showed December’s surge in payroll growth exceeded the highest forecast in a Bloomberg survey and capped the second-best year for American workers since 1999. The jobless rate held at 5 percent. Average hourly earnings increased 2.5 percent over the 12 months ended in December, less than the 2.7 percent median forecast.

“What a strong number like this can do is increase the probability of the Fed hiking rates in March," said Guy Haselmann, head of capital market strategy at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the Fed. “I just don’t think there’s that much inflation."

The Fed’s decision to raise its benchmark rate last month for the first time since 2006 was a “close call” for some policy makers who worried about too-low inflation and received assurances that their colleagues would closely monitor its progress, according to minutes of the Federal Open Market Committee’s Dec. 15-16 meeting, released Jan. 6.

Derivatives traders see the fed funds effective rate at about 0.8 percent at the end of 2016, compared with the median policy rate outlook of central bank officials of 1.375 percent.

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