TREASURIES-U.S. yields little changed as jobs report raises inflation concerns

BY Reuters | ECONOMIC | 12/02/22 04:19 PM EST
    (Adds comment, late-day pricings)
    By Herbert Lash
       NEW YORK, Dec 2 (Reuters) - Treasury yields pared sharp
gains on Friday after a strong U.S. jobs 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.
    An initial jump in yields softened later in the session on
investors adding longer-dated securities to their holdings on
falling bond prices and the short-covering of positions, said
Priya Misra, head of global rates at TD Securities in New York.
        "The demand came in the 10-year, which to me is 'I am
worried about a recession. It's going to happen next year, I
should get out of my short' or 'I'm uninvested and we got a rise
in rates, so I might as well take advantage of it'," she said.

    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.
    Brendan Murphy, head of global fixed income for North
America at Insight Investment, said "the fact that earnings have
spiked up again should give you a little bit of concern that
inflation could be stickier than people expect.
    "It's highly worrisome that it bumped up a bit," he said.
    Futures showed the market expects the terminal rate to rise
to 4.913% 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 23%, 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 0.5 basis
points at 4.259%, while the yield on 10-year yield
fell 3.5 basis points to 3.492%.
    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 -76.9 basis points.
    The yield on the 30-year Treasury bond was down
8.3 basis points to 3.550%.
        The breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) was last at
2.571%.
    The 10-year TIPS breakeven rate was last at
2.455%, 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 2.558%.
    Dec. 2 Friday 2:54 p.m. New York / 2054 GMT
                                               Price        Current   Net
                                                            Yield %   Change
                                                                      (bps)
 Three-month bills                             4.2125       4.3149    -0.001
 Six-month bills                               4.5025       4.669     0.009
 Two-year note                                 100-116/256  4.2593    0.005
 Three-year note                               101-112/256  3.9771    -0.013
 Five-year note                                101          3.6537    -0.024
 Seven-year note                               101-184/256  3.5945    -0.018
 10-year note                                  105-72/256   3.4916    -0.035
 20-year bond                                  103-36/256   3.7744    -0.062
 30-year bond                                  108-64/256   3.5503    -0.083

   DOLLAR SWAP SPREADS
                                               Last (bps)   Net
                                                            Change
                                                            (bps)
 U.S. 2-year dollar swap spread                 31.50        -1.25
 U.S. 3-year dollar swap spread                 11.50        -2.00
 U.S. 5-year dollar swap spread                  2.00        -1.75
 U.S. 10-year dollar swap spread                -4.50        -0.75
 U.S. 30-year dollar swap spread               -40.50         2.00


 (Reporting by Herbert Lash;
Editing by Nick Zieminski and Marguerita Choy)

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.

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