TREASURIES-Yields hit four-week highs, Fed expected to hike above 5%
By Karen Brettell
NEW YORK, Feb 6 (Reuters) - Benchmark 10-year U.S. Treasury yields hit four-week highs on Monday after Friday’s blowout employment number raised expectations that the Federal Reserve’s rate hikes will not end with a hard economic landing, and that the U.S. central bank may have more than one more rate increase left.
Employers added 517,000 jobs in January, while the unemployment rate hit 3.4%, its lowest reading for more than 53 years.
Other data on Friday also showed that U.S. services industry activity rebounded strongly in January, with new orders recovering and prices paid by businesses for materials continuing to rise at a moderate pace.
“That was a big rebound (in ISM) that took away some of the fears of December weakness,” said Jim Vogel, a senior rate strategist at FHN Financial in Memphis, Tennessee. Meanwhile, investors are looking at the jobs report and, seeing a “nice improvement in January”, have “turned it into inflation that we’re going to see soon”, Vogel said.
Average hourly earnings increased 0.3% last month after gaining 0.4% in December. That lowered the year-on-year increase in wages to 4.4%, the smallest rise since August 2021, from 4.8% in December. But wage growth was revised up for 2022, suggesting a more moderate pace of cooling than previously thought.
Benchmark 10-year yields rose as high as 3.640%, the highest since Jan. 6, and are up from a low of 3.333% on Thursday before the data. Two-year yields reached 4.435%, also the highest since Jan. 6.
The 10-year yields have fallen from a 15-year high of 4.338% on Oct. 21 on expectations that Fed tightening will lead to a recession this year.
EXPECTATIONS REVISED
Traders ramped up bets on rate cuts in the second half of this year after Fed Chairman Jerome Powell seemed unconcerned about loosening financial conditions and cited progress in bringing down inflation after the Fed’s meeting on Wednesday, when it raised rates by another 25 basis points.
But Friday’s data led to a repricing in these expectations. Fed funds futures traders now see rates rising above 5% in May and dropping to only 4.76% by December. On Thursday, traders had expected the rate to peak at 4.88% in June, and then fall to 4.40% by December.
Some banks are also readjusting their Fed forecasts in light on last week’s events.
“Chair Powell did not push back against market pricing for near-term monetary policy, nor the recent easing in financial conditions. Despite Powell’s dovish tone, front-end yields finished the week higher after Friday’s surprisingly strong labor market report. Hence, we’re adding an additional 25bp hike to our forecast and now see the Fed funds target range peaking in May at 5-5.25%,” JPMorgan analysts said in a report.
The Treasury Department will sell $96 billion in coupon-bearing supply this week, including $40 billion in three-year notes on Tuesday, $35 billion in 10-year notes on Wednesday and $21 billion in 30-year bonds on Thursday. (Editing by Kevin Liffey)
