U.S. Yields Climb to Highest in Almost Four Months Before Jobs

  • Jobs increased by 185,000 in October, economists estimate
  • Declining risk aversion will lead to Fed shift, Lonski writes

Treasury yields are climbing as though Friday’s jobs report will seal the Federal Reserve’s first interest-rate increase since 2006.

A pickup in employment gains will give credence to Fed Chair Janet Yellen’s comment this week that improving economic data would make rate increase a “live possibility” at the next policy meeting Dec. 15-16. The U.S. added 185,000 jobs in October, based on a Bloomberg survey of economists, compared with 142,000 in the previous month. The government is scheduled to issue the report at 8:30 a.m. in Washington.

“The Fed’s position is clearly that they are aiming to raise rates in December if at all possible, so the onus upon these numbers is more to persuade them not to move rather than to encourage them to hike,” said Richard McGuire, head of rates strategy at Rabobank International in London. “Even a modest surprise would firm expectations of a December move and put further upward pressure on the front end of the curve.”

U.S. 10-year note yields were little changed at 2.23 percent as of 6:47 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2 percent security due in August 2025 was 98. The extra yield that investors get for holding the securities instead of two-year notes was 139 basis points, down from a 2015 high of 178 basis points on July 13.

The yield on the Bloomberg U.S. Treasury Bond Index climbed to 1.64 percent Thursday, the highest level since July 13. The gauge is headed for a third weekly loss, with the decline totaling 1.2 percent.

Yellen, Dudley

Yellen and New York Fed President William Dudley both said this week that policy makers may boost interest rates as soon as next month. Fed Vice Chairman Stanley Fischer voiced confidence that inflation isn’t too far below the central bank’s goal.

“At this point, I see the U.S. economy as performing well,” Yellen said. If economic data continue to point to growth and firmer prices, a December rate hike would be a “live possibility.”

A decline in risk aversion will lead the Fed to act in December, John Lonski, the chief economist at Moody’s Investors Service in New York, wrote in a report Thursday.

“As markets become less risk-averse, the demand for credit-risk-free Treasuries declines, which, in turn, increases the 10-year Treasury yield,” he wrote.

Traders see a 56 percent chance the Fed will raise its benchmark by its Dec. 15-16 meeting, according to futures data compiled by Bloomberg. The figure has climbed from 33 percent on Oct. 2. The calculation assumes the central bank’s benchmark averages 0.375 percent after the first increase, compared with the current range of zero to 0.25 percent.

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