Treasuries Traders Shift Focus to Jobs Data as Fed Meeting Looms

  • U.S. debt advances before May U.S. employment report
  • Futures prices indicate a 22% chance of June Fed rate increase

Treasuries gained as traders scoured U.S. employment data for clues about whether the Federal Reserve will deem the economy strong enough to raise interest rates as soon as this month.

Yields dropped across maturities even as reports signaled sustained firming in the labor market, with applications for unemployment benefits falling for a third week and private payrolls increasing. Yet Friday’s crucial release of national labor data for May is forecast to confirm that job growth has slowed from earlier this year. The gap between yields on five- and 30-year debt, a gauge of the yield curve, fell to the lowest since December on a closing basis.

Fed officials have cited labor-market gains when discussing the potential for a near-term rate increase. Futures prices indicate about a 22 percent probability of a June hike, and coin-flip odds of a move in July, according to data compiled by Bloomberg. Fed Governor Daniel Tarullo said Thursday that he’d consider uncertainty surrounding the June 23 British vote on European Union membership at the central bank’s meeting this month. Traders will get more guidance from Fed Chair Janet Yellen when she delivers remarks on June 6.

Investors are piling into U.S. debt ahead of the Friday data “in case the employment report is weak or Yellen’s speech is dovish, or the Fed passes on raising rates in June and July,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 23 primary dealers that trade with the Fed. “Everything will change with tomorrow’s employment release.”

Yields Fall

The benchmark 10-year note yield fell four basis points, or 0.04 percentage point, to 1.80 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 98 13/32.

Treasuries gained along with European government bonds as European Central Bank President Mario Draghi unveiled largely unchanged inflation forecasts for the euro zone even as the bank’s latest stimulus measures start to take effect.

Private U.S. payrolls increased by 173,000 in May, according to a report Thursday from the ADP Research Institute. Filings for U.S. unemployment benefits fell to 267,000 in the week ended May 28, according to Labor Department data.

Economists in a Bloomberg survey forecast that the Labor Department’s May nonfarm payrolls report Friday will show employers added 160,000 jobs for the second straight month, representing a slowdown from last year’s average monthly growth of 229,000 jobs. The unemployment rate is expected to fall to 4.9 percent from 5 percent. Average hourly earnings are projected to climb 0.2 percent in May from the month before and 2.5 percent from a year earlier.

“As long as job growth is north of 100,000 for May, rate hikes are still a strong possibility,” said Guy Lebas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, and the most accurate Treasuries market forecaster last year. “Whether that’s June, July or September is a matter of fine tuning.”

Before it's here, it's on the Bloomberg Terminal.