TREASURIES-U.S. yields little changed as job market raises inflation concerns

BY Reuters | ECONOMIC | 12/02/22 02:50 PM EST
    (Adds remark, fresh data)
    By Herbert Lash
       NEW YORK, Dec 2 (Reuters) - Treasury yields were little
changed on Friday after a strong unemployment report for
November showed a resilient labor market with rising wages, a
potential thorn for the Federal Reserve as it moves to slow its
hiking of interest rates to tame high inflation.
    Nonfarm payrolls increased by 263,000 jobs last month as
employees hired more workers than expected and data for the
prior month was revised higher, the Labor Department said.
    Another sign of a strong labor market was a 0.6% increase in
average hourly earnings after a 0.5% advance in October. It was
the biggest monthly rise in 10 months and nudged the annual rate
to 5.1% from 4.9% in October. Wages peaked at 5.6% in March.
    The acceleration in average hourly earnings and a
third-straight drop in labor force participation will likely
trouble Fed policymakers, said Joe LaVorgna, chief U.S.
economist at SMBC Nikko Securities in New York.
        "Their intention from what Powell has said and from what
the latest data show is that they will keep rates up at these
levels until it's clear inflation is trending lower," he said,
referring to the U.S. central bank chairman, Jerome Powell.

        The report is "precisely what Chair Powell told us
earlier this week he was most worried about. Wages are rising
more than productivity, as labor supply continues to shrink," he
said.

    The outlook for a soft landing may have increased as the
strong labor market keeps consumption relatively well supported,
said Brendan Murphy, head of global fixed income for North
America at Insight Investment.
    But "the fact that earnings have spiked up again should give
you a little bit of concern that inflation could be stickier
than people expect," he said. "It's highly worrisome that it
bumped up a bit."
    Futures showed the market expects the terminal rate to rise
to 4.93% in May, up about 7 basis points from the day before.
 The chance of a fifth-straight 75 bps hike when Fed
policy-makers meet Dec. 13-14 rose to 20.6%, according to CME's
FedWatch Tool. A 50 bps hike is still the greatest likelihood.
    The terminal rate has changed the past few days on hopes the
Fed can deliver a soft landing, said John Luke Tyner, fixed
income analyst at Aptus Capital Advisors.
    "It's time again to upgrade expectations of the terminal
rate back higher, again. This report keeps pressure on the Fed
to keep hiking and stay tight for longer," Tyner said in a note.
    The two-year Treasury yield, which typically
moves in step with interest rate expectations, rose 3.2 basis
points at 4.286%, while the yield on 10-year yield
down 1 basis points to 3.517%.
    Earlier the 10-year yield briefly traded below 3.5% before
the data's release, then shot to 3.638% before slipping.
    The yield curve measuring the gap between yields on two- and
10-year notes, seen as a recession harbinger, was
at -77.3 basis points.
    The yield on the 30-year Treasury bond was down
5.8 basis points to 3.575%.
        The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.555%.
    The 10-year TIPS breakeven rate was last at
2.425%, indicating the market sees inflation averaging about
2.4% a year for the next decade.
    The U.S. dollar 5 years forward inflation-linked swap
, seen by some as a better gauge of inflation
expectations due to possible distortions caused by the Fed's
quantitative easing, was last at 2.516%.
    Dec. 2 Friday 1:21 p.m. New York / 1921 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             4.2175       4.3201    0.004
 Six-month bills                               4.5175       4.6849    0.025
 Two-year note                                 100-103/256  4.2862    0.032
 Three-year note                               101-96/256   3.9996    0.010
 Five-year note                                100-230/256  3.6761    -0.002
 Seven-year note                               101-148/256  3.6173    0.004
 10-year note                                  105-20/256   3.5153    -0.012
 20-year bond                                  102-224/256  3.7931    -0.043
 30-year bond                                  107-200/256  3.5745    -0.058

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 30.75        -2.00
 U.S. 3-year dollar swap spread                 11.25        -2.25
 U.S. 5-year dollar swap spread                  2.00        -1.75
 U.S. 10-year dollar swap spread                -4.75        -1.00
 U.S. 30-year dollar swap spread               -40.75         1.75

 (Reporting by Herbert Lash;
Editing by Alison Williams and Nick Zieminski)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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