Treasuries' Lower-for-Longer Yield Mantra Ratified by Jobs Data

  • Average hourly earnings suggest inflation is in check
  • Decline in oil prices adds to appeal of longer maturities

Bond investors are buying into Federal Reserve officials’ message that interest rates will rise gradually after liftoff from near zero.

Treasuries rallied Friday, led by longer maturities, as government data showing the biggest back-to-back months of U.S. job gains in almost a year also indicated slowing growth in average hourly earnings, reinforcing expectations that inflation will remain in check.

Fed policy makers have stressed that decisions on interest rates will depend on economic data, and the employment statistics left investors pricing in three rate boosts in the next year, according to a Morgan Stanley index.

“The discussions are going to be around the pace of hikes,” said Christopher Sullivan, who’s added Treasuries to the $2.4 billion he oversees as chief investment officer at United Nations Federal Credit Union in New York. “The Fed will likely be quite cautious.”

Yields on benchmark 10-year notes rose five basis points this week, or 0.05 percentage point, to 2.27 percent, according to Bloomberg Bond Trader prices. The price on the 2.25 percent note due in November 2025 fell almost 1/2, or $5 per $1,000 face amount, to 99 26/32.

Yield Lure

Investors found value after the note’s yield peaked at 2.36 percent Friday, the highest since Nov. 9, in the minutes after the release of the labor report. The two-year yield reached 0.99 percent this week, the highest since May 2010.

The Friday rally followed a bond-market rout the previous day after the European Central Bank announced stimulus measures that disappointed investors.

The message from the Fed about its intentions has been clearer, said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut.

“They’ve said it, and they’ve said and they’ve said it again,” Ader said. Nothing in Friday’s data “adds to the second hike, the third hike, the fourth hike or the timing of it.”

Longer-dated Treasuries are attractive, with the 10-year yield likely to end 2015 at 2.25 percent and close 2016 at that level as well, Ader said.

The earnings data in Friday’s labor report, combined with a decline in oil prices, added to skepticism that inflation will approach the 2 percent level of personal consumption expenditures targeted by the Fed.

“This report has more ramifications for future rate hikes than the first rate hike,” 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.”

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