BOND REPORT: Treasury Yields Track Higher After Upbeat Jobs Report

By Rachel Koning Beals Features Dow Jones Newswires

Germany's bund yield holds at yield at 18-month high

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Treasury yields climbed on Friday, pausing a recent global selloff in government bonds, as a better-than-expected jobs report offers support to the Federal Reserve's plan to raise interest rates and begin shrinking its bloated balance sheet as early as September.

The 10-year Treasury yield rose 1 basis point to 2.378%, trading at its highest levels since early May, while the 30-year Treasury bond's yield rose 2.2 basis points to 2.925%.

The yield on the 2-year Treasury note, the most sensitive to shifting tides in the monetary-policy outlook, slipped 0.8 basis point to 1.395%.

Bond prices move up as yields go down; one basis point is one hundredth of a percentage point.

Long-dated yields, in particular, rose after the Labor Department reported the U.S. economy created 222,000 new jobs in June, beating the consensus estimate of 179,000 from economists surveyed by MarketWatch. The unemployment rate ticked up to 4.4%, while average hourly earnings stayed at 0.2%, the same pace of wage growth as last month.

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Strong job gains lend credence to optimists who say the U.S. economy isn't running out of gas soon, and could bring about higher growth and inflation expectations. Those factors tend to be bearish for Treasurys, as they exert a corrosive effect on bonds' fixed payments. But analysts said looking past the nonfarm payrolls number revealed the underlying details were more lackluster, including sluggish wage growth. .

"It really was a mixed bag. In the details, it still doesn't suggest stronger labor-market conditions," said Lindsey Piegza, chief economist for Stifel Fixed Income

She said wage growth in June fell below expectations and that May's figure was lowered to 0.1%. More jobs should in theory push up wages, but the failure to see hourly earnings rise highlights the troubling trend of reduced unemployment but muted inflation.

Analysts also focused on the broadest measure of the unemployment rate, the so-called U6 number, sometimes referred to as the "real" unemployment rate, which climbed to 8.6% from 8.4%. The U6 rate tallies those who can only find part-time jobs as well as people who recently gave up looking for work.

"This was certainly a step in the right direction, but from the Fed's perspective there's little to hang their hat on. It's mediocre enough to support the Fed's notion for an additional rate hike this year, but there's no evidence that the economy can support a second layer of policy adjustment like a balance-sheet reduction," said Piegza.

Friday's trading comes against the backdrop of recent rout in bonds that have pushed yields sharply higher, as investors take a cautious stance amid renewed fears that central banks around the globe, including the European Central Bank, were on the verge of halting easy-money policies.

That has put pressure on long-date bonds. On Thursday, the yield 10-year German bond, aka the bund, hit its highest yield in about 18 months. The yield on 10-year German paper was unchanged at 0.563%.

The yield on the 30-year bond saw a weekly jump of more than 10 basis points, marking its largest single-day gain in more than two months on Thursday.

See: U.S. adds 222,000 jobs in June as hiring surges (http://www.marketwatch.com/story/us-adds-222000-jobs-in-june-as-hiring-surges-2017-07-07)

Elsewhere, Japan's benchmark 10-year government bond yield rose at one point Friday to 0.105%, its highest since Feb. 3, a market move that sparked fresh efforts by the Bank of Japan to stymie the climb in market interest rates.

The yield on the 10-year Japanese government bond later slipped back to 0.083%, after the BOJ said it would buy an unlimited amount of government bonds maturing in five to 10 years at a yield equivalent to 0.110% and raised the amount the amount of bonds it said it would buy at a regularly scheduled auction, The Wall Street Journal reported (https://www.wsj.com/articles/bank-of-japan-punches-down-bond-yields-1499417998). The central bank's target is 0% for the benchmark, part of its longstanding policy to help prop up the domestic economy.

(END) Dow Jones Newswires

July 07, 2017 10:13 ET (14:13 GMT)