Treasuries Hold Three-Day Advance Before U.S. Payrolls Data

  • Payrolls increased by 160,000 in May, Bloomberg survey shows
  • Odds of Fed raising rates by July at 55 percent: fed futures

Treasuries held a three-day gain as investors waited for the Labor Department’s monthly report, which may offer clues on the timing of an interest-rate increase by the Federal Reserve.

Benchmark 10-year yields were little changed Friday, set for the first weekly decline since May 13. The labor market data may bring further support to wagers that the Fed will increase borrowing costs this year, following remarks from several policy makers in favor of higher rates.

The chances of the Fed raising rates by July have climbed to 55 percent from about 26 percent at the start of May, according to data based on fed fund futures compiled by Bloomberg. The probability of a move by December is 76 percent.

“The question is whether the payrolls can change the probability of an interest rate hike,” said Birgit Figge, a fixed-income strategist at DZ Bank AG in Frankfurt. “The volatility will be high, but there won’t be a trend to higher yields unless the Fed makes it clearer.”

Treasury 10-year notes yielded 1.80 percent as of 6:59 a.m. New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in May 2026 was 98 14/32. The yield has dropped six basis points, or 0.06 percentage point, this week.

Speaking in London Friday, Chicago Fed President Charles Evans said he “can see the rationale for two rate hikes this year.” Evans is a non-voting member of the Federal Open Market Committee.

Labor Data

Nonfarm payrolls increased by 160,000 in May, matching the advance in April, according to the median forecast in a Bloomberg survey of economists before the data. Average hourly earnings rose 2.5 percent from the year before, also matching April’s pace, a separate survey suggested.

“The more important data will be the wages. If it comes in at 2.5 percent or above, the market will gain more conviction about a summer rate hike from the Fed,” said Peter Chatwell, head of rates strategy at Mizuho International Plc in London. “We would expect the Fed funds strip to move more towards a July hike.”

After Friday’s employment data, market focus will shift to Fed Chair Janet Yellen’s June 6 address at the World Affairs Council of Philadelphia for her view on global conditions amid growing concern the U.K. will leave the European Union after its referendum. Fed officials’ next policy meeting is scheduled for June 14-15.

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