Treasuries Decline as Investors Prepare for U.S. Payrolls Report

Updated on
  • Fed’s Mester says there’s a ‘compelling’ case to raise rates
  • Economists forecast jobs growth slowed to 180,000 in August

Treasuries fell before the Labor Department releases its latest jobs data, where a stronger-than-forecast reading would embolden the Federal Reserve’s view that the economy is approaching its targets on employment.

The yield difference, or spread, between two- and 30-year securities held near its narrowest in more than eight years after Cleveland Fed President Loretta Mester said there’s a “compelling” case for gradually raising interest rates. U.S. jobs growth slowed to 180,000 last month from 255,000 in July, according to the median estimate in a Bloomberg survey of analysts. Fed Vice Chairman Stanley Fischer said this week economic data will determine the trajectory of interest-rate increases.

“Investors are on tenterhooks ahead of today’s U.S. employment report following a host of hawkish Fed comments,” said Nick Stamenkovic, a fixed-income strategist at Edinburgh-based broker RIA Capital Markets Ltd. “The front end is vulnerable to an upside surprise in payrolls and that explained a pick-up in yields ahead of the data.”

Benchmark Treasury 10-year note yields climbed two basis points, or 0.02 percentage point, to 1.59 percent as of 6:55 a.m. New York time. The 1.5 percent security due in August 2026 fell 6/32, or $1.88 per $1,000 face amount, to 99 6/32.

Spread Narrows

The yield on two-year notes rose one basis point to 0.79 percent, while that on 30-year bonds increased two basis points to 2.25 percent, leaving the spread at 146 basis points. The gap narrowed to 140 basis points on Aug. 29, the least on a closing basis since the end of 2007.

A payrolls number of more than 200,000, “accompanied by accelerating wage growth, would significantly increase the pressure on the Fed to hike rates” at the policy meeting scheduled Sept. 20-21, RIA’s Stamenkovic said.

Mester, who votes this year on the Federal Open Market Committee, joined the recent hawkish chorus of her FOMC colleagues. Fed Chair Janet Yellen said last week in Jackson Hole, Wyoming, that the case for higher rates had strengthened.

The odds of the Fed raising rates this month increased to 34 percent, from 18 percent at the start of August, according to fed fund futures data compiled by Bloomberg. The chance of an increase by December was 60 percent.