Treasuries Gain for Second Week as Federal Reserve Seen on Hold

  • U.S. added fewer jobs than forecast in April as wages rose
  • Futures traders lower chance of June Fed rate increase to 8%

El-Erian: Market Over-Reaction to April Jobs Report

Treasuries gained for a second week as a report showing the U.S. economy added fewer jobs than forecast in April bolstered views that the Federal Reserve is in no rush to raise interest rates.

Benchmark 10-year notes pared advances after a Labor Department report showed the U.S. created 160,000 jobs last month, compared with the 200,000 median forecast in a Bloomberg survey of economists, while average hourly earnings rose 2.5 percent from a year earlier, exceeding estimates.

Investors have been buffeted by mixed signals as they seek clues about the Fed’s monetary policy path. On the one hand, inflation expectations have rebounded after falling in February to the lowest since 2009. Yet international data this week stoked concern that slowing global economies may crimp U.S. growth, sparking a rally in U.S. debt.

“Data overall has been somewhat on the weaker side,” said Subadra Rajappa, head of U.S. rates strategy at Societe Generale SA, one of 23 primary dealers that trade with the Fed. The jobs report “is not necessarily bolstering confidence on the outlook.”

The benchmark 10-year yield declined five basis points this week, or 0.05 percentage point, to 1.78 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due February 2026 was 98 5/8.

Fed Odds

Yields on the two-year note, which is more sensitive to interest rate expectations, fell five basis points this week to 0.73 percent and touched the lowest since February.

The market-implied probability of a Fed rate increase by year-end was 53 percent, futures data compiled by Bloomberg indicate, down from 58 percent a week ago. The probability of an increase at the Fed’s June meeting fell to 8 percent from 12 percent last week.

Officials including St. Louis Fed President James Bullard said this week that June’s gathering is “live.” In March, policy makers including Fed Chair Janet Yellen projected two rate increases in 2016 as they look for signs that inflation is rising toward the central bank’s 2 percent target.

“I think that Yellen, more than jobs, is focused on wages,” Bill Gross, manager of the $1.3 billion Janus Global Unconstrained Bond Fund, said in an interview on Bloomberg Television. “What you have to do is recognize that the Fed and other central banks will stay low for a long time.”

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