TREASURIES-Ten-year yields at four week high before Powell

BY Reuters | ECONOMIC | 02/07/23 09:36 AM EST

By Karen Brettell

NEW YORK, Feb 7 (Reuters) - Benchmark 10-year Treasury yields were at four-week highs as investors waited to see whether Federal Reserve Chairman Jerome Powell will strike a more hawkish tone when he speaks later on Tuesday, following unexpectedly strong jobs data last week.

Investors interpreted Powell as taking a more dovish approach to further rate increases after the Fed concluded its two-day meeting on Wednesday as he pushed back against loosening financial conditions being an issue for Fed policy and talked up progress in bringing down price pressures.

But traders repriced for more rate hikes, and fewer cuts later this year, after data on Friday showed that employers added 517,000 jobs in January, far more than economists had expected, while the unemployment rate hit 3.4%, its lowest reading in more than 53 years.

"There's been a tendency through much of the last year for Fed speakers to amplify the last data point, which in this case of course was the strong nonfarm payrolls print on Friday," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia.

"So, in contrast to the tone that was struck at the FOMC press conference last week, he might be a little bit more cautious specifically about the risk of strong labor markets feeding back into another resurgence of inflation," LeBas 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 upward for 2022, suggesting a more moderate pace of cooling than previously thought.

Minneapolis Fed President Neel Kashkari said on Tuesday that the Fed will probably have to raise interest rates to at least 5.4% in order to tame high inflation with January job gains showing policy actions so far have done little to dent the labor market.

Atlanta Fed President Raphael Bostic said on Monday that the jobs data means the U.S. central bank may need to lift borrowing costs higher than previously anticipated.

Benchmark 10-year yields rose as high as 3.666%, the highest since Jan. 6, and are up from a low of 3.333% on Thursday before the data. Two-year yields were last at 4.452%, after reaching 4.493% on Monday, also the highest since Jan. 6.

Fed funds futures traders now see rates rising above 5% in May and dropping to only 4.79% by December. On Thursday, traders had expected the rate to peak at 4.88% in June, and then fall to 4.40% by December.

The Treasury Department will sell $40 billion in three-year notes on Tuesday, the first sale of $96 billion in coupon-bearing supply this week. It will also sell $35 billion in 10-year notes on Wednesday and $21 billion in 30-year bonds on Thursday. (Reporting by Karen Brettell; editing by Jonathan Oatis)

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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