U.S. yields jump to new highs ahead of jobs data

NEW YORK — U.S. Treasury yields surged in

a volatile trading session on Thursday as investors anticipated

strong job reports that could spur further aggressive monetary

tightening by the U.S. Federal Reserve as it seeks to fight

four-decade-high inflation.

U.S. government bond yields – which move inversely to prices

– have been climbing after comments by Federal Reserve Chair

Jerome Powell last week that indicated the central bank will

keep raising interest rates to fight inflation even as that

causes pain for households and businesses.

On Thursday, benchmark U.S. Treasury 10-year yields

rose by over 13 basis points to an over two-month

high of 3.26% ahead of the release of a Labor Department report

showing that U.S. weekly jobless claims declined further,

confirming tight labor conditions.

Two-year note yields jumped to a new 15-year high

of 3.511% and five-year yields increased by over 12

basis points to 3.407%.

The moves come ahead of the release of the key report on

nonfarm payrolls data, due on Friday, which is likely to further

cement expectations the Fed will continue with outsized rate

hikes after three straight increases of 75 basis points.

“I think consensus is that all the jobs numbers this week

are going to be pretty strong, and people are probably

front-running that a bit,” said Thomas Hayes, chairman and

managing member of New York-based Great Hill Capital.

Hayes said he expects Treasury yields to keep climbing in

the coming days until the Consumer Price Index (CPI) inflation

report, due Sept. 13. “I think the bears are in control

short-term, but will have an unpleasant surprise mid-month when

they realize inflation is really starting to come under

control,” he said.

Fed funds futures’ traders were pricing in a 75% chance of

the Fed hiking interest rates by 75 basis points at its next

policy-making meeting on Sept. 20-21. They expect interest rates

to keep climbing to a high of over 3.95% in March, with some

rate cuts priced in for later next year.

Just a few weeks ago, the expectation was for the Fed to

start cutting rates as soon as March 2023 to boost a dwindling

economy bruised by the current rate-hiking cycle.

“I think the anticipation around more hawkishness is coming

from the various Fed speakers over the past week,” said Ryan

O’Malley, fixed income portfolio manager at Sage Advisory.

“They’ve been very clear that they don’t intend to ‘pivot’

anytime soon, and were dismayed by the market pricing in an

anticipation of such a pivot from mid-June through the end of

July,” he said.

Real U.S. yields, as represented by Treasury

Inflation-Protected Securities, or TIPS, have also been climbing

in recent weeks. On Thursday, yields on 10-year TIPS

jumped to 0.805%, the highest since mid-June.

Five-year TIPS yields reached 0.867%, the highest

since January 2019.

The breakeven rate on five-year TIPS was last

at 2.661%, down from over 2.9% last week. The five years forward

inflation-linked swap, seen by some as a better

gauge of inflation expectations, has also declined, to 2.559%

from over 2.6% earlier this week.

The closely watched part of the U.S. Treasury curve

measuring the spread between yields on two- and 10-year notes

stayed inverted but narrowed to minus 25.7 basis

points, the steepest it has been in a week.

An inversion of this yield curve is typically a precursor to

recession, predicting eight of the last nine U.S. downturns.

September 1 Thursday 3:00PM New York / 1900 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 2.8875 2.9489 0.018

Six-month bills 3.2725 3.3735 0.024

Two-year note 99-124/256 3.5199 0.070

Three-year note 98-210/256 3.5491 0.088

Five-year note 98-182/256 3.4078 0.122

Seven-year note 98-120/256 3.3726 0.130

10-year note 95-168/256 3.2646 0.133

20-year bond 96-32/256 3.65 0.129

30-year bond 92-252/256 3.3739 0.119

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap 35.25 -0.25

spread

U.S. 3-year dollar swap 13.75 -0.75

spread

U.S. 5-year dollar swap 6.75 -1.00

spread

U.S. 10-year dollar swap 8.75 0.00

spread

U.S. 30-year dollar swap -29.25 -1.25

spread

(Reporting by Davide Barbuscia; Editing by Emelia

Sithole-Matarise and Jonathan Oatis)