Treasurys Strengthen as Data Show Slow Wage Growth

By Sam Goldfarb Features Dow Jones Newswires

A rally in U.S. government bonds picked up further momentum Friday as the latest jobs report showed soft wage growth for workers, bolstering the view that stubbornly weak inflation could cause the Federal Reserve to slow down the pace of its interest-rate increases.

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Bond prices have been climbing in recent weeks in large part because of declining inflation expectations, which has stemmed from soft data as well as dimming prospects for fiscal stimulus out of Washington.

Friday's jobs report fit neatly into this narrative. On top of lower-than-expected employment gains in May, hourly earnings for private-sector workers rose just 2.5% from the previous year, the Labor Department said. That was the same growth rate as the previous month and below what many experts believe is needed to meaningfully drive up costs elsewhere in the economy.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.149%, according to Tradeweb, compared with 2.201% just before the report was released and 2.217% Thursday. The yield's previous intraday low this year was 2.165%, while its lowest closing level was 2.177%.

Yields fall when bond prices rise.

Wage growth is a top concern for bond investors because of what it means for broader inflation, which is one of the biggest threats to long-term bonds, since rising prices for goods and services make fixed debt payments less valuable.

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According to textbook economic theory, wages should rise as the economy reaches full employment, and that should eventually lead to higher inflation and tighter monetary policy. In the current economic expansion, however, wages have been slow to rise even as the unemployment rate has declined steadily.

Fed officials are looking for sustained monthly wage increases of 0.3%, said Jim Vogel, interest-rates strategist at FTN Financial. "An occasional 0.4% [increase] would be helpful," but the actual number has been falling below target, he said.

Despite the lackluster data, most investors still expect the Fed to raise interest-rates at its June 13-14 policy meeting. After a long period of ultraloose monetary policy, the central bank has raised rates in each of the past two quarters and has signaled the potential for at least two more increases by the end of this year.

Fed funds futures, used by hedge funds and money managers to bet on the Fed's rate policy outlook, showed Friday 89% odds for the Fed to tighten monetary policy this month, according to CME Group. That was roughly unchanged from earlier in the week.

Several Fed officials have they said they aren't too worried about the inflation data, attributing the declines to temporary factors. A couple, though, have expressed greater concern, suggesting it could be a sign of continued slack in the labor market.

Complicating matters is the Fed's stated intention to start reducing its bondholdings this year, which includes more than $2 trillion of Treasury debt.

Officials could back away from that plan. But if they don't, many investors expect them to hold off on raising interest rates to make sure that the balance sheet unwinding doesn't cause undue volatility in the financial markets.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

A rally in U.S. government bonds picked up further momentum Friday as the latest jobs report showed soft wage growth for workers, bolstering the view that stubbornly weak inflation could cause the Federal Reserve to slow down the pace of its interest-rate increases.

Demand for bonds sent the benchmark 10-year Treasury note down to 2.159%, its lowest close since Nov. 10, from 2.217% Thursday. Yields fall as bond prices rise.

Bond prices have been climbing in recent weeks in large part because of declining inflation expectations, which has stemmed from soft data as well as dimming prospects for fiscal stimulus out of Washington.

Friday's jobs report fit neatly into this narrative. On top of lower-than-expected employment gains in May, hourly earnings for private-sector workers rose just 2.5% from the previous year, the Labor Department said. That was the same growth rate as the previous month and below what many experts believe is needed to meaningfully drive up costs elsewhere in the economy.

Wage growth is a top concern for bond investors because of what it means for broader inflation, which is one of the biggest threats to long-term bonds, since rising prices for goods and services make fixed debt payments less valuable.

As they raise interest rates, Fed officials are generally looking for monthly wage increases of 0.3%, said Jim Vogel, interest-rates strategist at FTN Financial. "An occasional 0.4% [increase] would be helpful," but the actual numbers have been falling below target, he said.

Most investors still expect the Fed to raise interest rates at its June 13-14 policy meeting. After a long period of ultraloose monetary policy, the central bank has raised rates in each of the past two quarters and signaled the potential for at least two more increases by the end of this year.

Still, many investors are unsure about the outlook for monetary policy beyond this month.

In recent weeks, several Fed officials have they said they aren't too worried about inflation, attributing recent declines to temporary factors. A couple, though, have expressed more concern, suggesting it could be a sign of continued slack in the labor market.

Complicating matters is the Fed's stated intention to start reducing its bondholdings this year, which includes more than $2 trillion of Treasury debt.

Officials could back away from that plan. But if they don't, many investors expect them to hold off on raising interest rates for a period of time to make sure that the balance sheet unwinding doesn't cause undue volatility in the markets.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

June 02, 2017 16:02 ET (20:02 GMT)