Treasury 2-Year Notes Jump as Jobs Data Crimp Fed Rate-Hike Odds

U.S. Adds 151,000 Jobs in August, Jobless Rate at 4.9%

Shorter-dated Treasuries gained as a report indicating the U.S. added fewer jobs than forecast in August undermined the Federal Reserve’s case to raise interest rates this year.

Yields on two-year notes, the coupon securities most sensitive to Fed policy, declined for a second day as a Labor Department report showed employers added 151,000 positions last month, versus a median forecast of 180,000 in a Bloomberg survey of economists. Futures prices signaled a reduced probability of a Fed rate hike this month.

Mixed U.S. economic data in the past week pushed traders to pare wagers on a 2016 hike after Fed Chair Janet Yellen said on Aug. 26 the case for higher rates had strengthened. Minutes from the central bank’s July meeting showed policy makers divided on the matter. Bond-market strategists and investors in recent weeks have suggested the August jobs report will be a key determinant of the central bank’s rate path.

“Not only was the headline below expectations, but wages were soft, the workweek fell a tenth,” John Briggs, head of strategy for the Americas at RBS Securities Inc. in Stamford, Connecticut, one of the 23 primary dealers that trade with the Fed, said. “I don’t see why the Fed would raise rates in September.”

U.S. two-year note yields fell two basis points, or 0.02 percentage point, to 0.76 percent as of 8:55 a.m. New York time, according to Bloomberg Bond Trader data. 

Benchmark 10-year note yields rose one basis point to 1.57 percent.

Futures prices showed a 24 percent chance of a rate hike this month and a 56 percent probability of a hike in 2016, according to futures data compiled by Bloomberg. Shortly before the report’s release Friday, traders saw about a 36 percent probability of a rate increase this month and about a 59 percent probability of a hike in 2016.

The Labor Department report showed average hourly earnings rose 0.1 percent from a month earlier to $25.73, following a 0.3 percent increase in the prior month. The year-over-year increase was 2.4 percent, compared with 2.7 percent in the 12 months through July. The average work week for all workers decreased by 6 minutes to 34.3 hours in July.

“The weaker wage-growth figure isn’t the smoking gun the Fed was looking for to make a September rate hike a done deal,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities (USA) LLC, a primary dealer. “What’s more interesting is that aggregate hours declined this month -- for the first time since February -- which doesn’t augur well for consumer growth.”

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