U.S. yields rise as strong jobs data points to Fed rate hike

NEW YORK — Treasury yields edged

higher on Friday after data showed the U.S. economy continued to

churn out jobs at a brisk pace in March amid a tight labor

market that increased the likelihood the Federal Reserve will

hike interest rates again in May.

Nonfarm payrolls increased by 236,000 jobs last month, the

Labor Department said, while data for February was revised

higher to show 326,000 jobs were added instead of 311,000 as

previously reported.

Economists polled by Reuters had forecast non-farm payrolls

rising 239,000 in March.

“The data are going to keep the Fed on track for a

25-basis-point hike in May,” said Kim Rupert, managing director

of global fixed income at Action Economics in San Francisco.

“We are looking for a 25-basis-point increase in June too,

and these numbers would fit that bill.”

The two-year Treasury yield, which typically

moves in step with rate expectations, rose 14.3 basis points to

3.964%, reversing a sharp decline earlier this week on concerns

the economy was slowing so fast it would fall into recession.

The yield on 10-year Treasury notes also rose,

up 8.2 basis points to 3.372%.

The data showed the unemployment rate declined to 3.5% from

3.6% the prior month, while the annual increase in wages fell to

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4.2% from 4.6% in February, a slower pace that is likely to

please the Fed as it tightens monetary policy to curb inflation.

“The bright spot is again the average hourly earnings. They

came in a little bit below expectations,” said Russell Price,

chief economist at Ameriprise Financial in Troy, Michigan, who

nevertheless called the jobs market tight.

“That is further encouraging for the Fed that wage inflation

is easing, and thus may be taking some pressure off their need

to increase rates further.”

Futures showed the likelihood that the Fed will raise rates

by 25 basis points when policymarkers conclude a two-day meeting

on May 3 rose to 70.7% from 49.2% on Thursday, according to the

CME’s FedWatch Tool.

Expectations for the Fed’s overnight lending also rose to

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above 5%, while the size of rate cuts projected by year-end

narrowed as the target rate rose to 4.369% from 4.193% before

the morning’s unemployment report..

The market is caught between those who see a hard landing

from tighter credit and those who just see slower growth.

“We think the credit crunch will just be a blip and really

won’t impact tremendously,” Rupert said. “Treasury yields have

increased, as one would expect, reflecting that expectation.”

Bank credit growth has dropped below the long-term average

of about 7.2% and is now below 5.0%, a rate that is often,

though not always, associated with recessions.

The yield curve measuring the gap between yields on two- and

10-year Treasuries, seen as a recession harbinger

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when yields on shorter-dated securities are higher than those

with longer terms, remained inverted at -52.8 basis points.

The yield on the 30-year Treasury bond was up

5.1 basis points to 3.591%.

The breakeven rate on five-year U.S. Treasury

Inflation-Protected Securities (TIPS) was last at

2.4%.

The 10-year TIPS breakeven rate was last at

2.26%, indicating the market sees inflation averaging about 2.3%

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 2.461%.

April 7 Friday 9:59 a.m. New York / 1359 GMT

Price Current Net

Yield % Change

(bps)

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Three-month bills 4.785 4.9082 0.023

Six-month bills 4.735 4.9159 -0.029

Two-year note 99-212/256 3.9659 0.145

Three-year note 102-122/256 3.7238 0.137

Five-year note 100-176/256 3.4731 0.116

Seven-year note 101-60/256 3.4244 0.099

10-year note 101-16/256 3.372 0.082

20-year bond 102-80/256 3.7091 0.054

30-year bond 100-156/256 3.5914 0.051

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 32.25 0.25

U.S. 3-year dollar swap spread 16.50 0.25

U.S. 5-year dollar swap spread 6.50 -0.25

U.S. 10-year dollar swap spread -0.25 0.00

U.S. 30-year dollar swap spread -40.75 0.00

(Reporting by Herbert Lash; Editing by Jan Harvey)