Government Bonds Slip After Jobs Report Shows Labor Market Strength

By Gunjan Banerji Features Dow Jones Newswires

Government bonds strengthened Friday after the monthly jobs report showed that wage growth remained tepid despite the lowest unemployment rate in over a decade.

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The yield on the 10-year Treasury note fell to 2.367% in early trading, according to Tradeweb, from 2.374% on Thursday. Yields fall as bond prices rise.

Yields swung briefly then steadied after data showing U.S. employers hired workers at a healthy rate in November and the unemployment rate maintained its 17-year low. Nonfarm payrolls rose a seasonally adjusted 228,000 in November, higher than what economists surveyed by The Wall Street Journal expected.

Some analysts said wage growth figures weren't as robust, a sign that inflation remains muted. Wages improved at a subdued pace of 2.5% from a year earlier in November. Average hourly earnings for private-sector workers ticked up 5 cents in November to $26.55, after falling the prior month.

"You're not seeing the pick-up in wages that would lead to more spending and therefore more inflation," said George Rusnak, co-head of global fixed income strategy at Wells Fargo Investment Institute.

Inflation is a threat to government bonds because it erodes the purchasing power of the debt's fixed payments and can prompt the Federal Reserve to raise interest rates.

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Friday's jobs report likely doesn't change investors' expectations that the central bank will raise interest rates at its meeting next week, Mr. Rusnak said. That helped mute swings in the market Friday.

Fed officials have signaled three interest-rate increases in 2018. Mr. Rusnak said that he expects the central bank to raise rates this month, but the outlook for path of rate increases next year remains murkier.

Bond yields have moved in a narrow range in recent weeks, with investors watching progress on a tax plan in Congress. Analysts have generally expected that progress on tax cuts would lead to higher bond yields, in part because legislation that expands the budget deficit could prompt the government to issue more debt, weighing on the prices. Tax cuts could also spur some growth and inflation, another blow to Treasurys.

Some analysts said tax cuts could have a relatively modest impact on long-term yields if the Treasury Department chooses to fund additional deficits, mostly with short-term debt. Any inflationary effect could also be mitigated if the Fed responds with rate increases.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

U.S. government bonds slipped Friday after the monthly jobs report showed ongoing strength in the labor market but tepid wage growth.

The yield on the benchmark 10-year U.S. Treasury note ticked up to 2.383% from 2.374% on Thursday, capping two consecutive weeks of yield gains. Yields rise as bond prices fall.

Yields swung briefly then steadied after data showing U.S. employers hired workers at a healthy rate in November and the unemployment rate maintained its 17-year low. Nonfarm payrolls rose a seasonally adjusted 228,000 in November, higher than what economists surveyed by The Wall Street Journal expected.

Friday's jobs report likely doesn't change investors' expectations that the central bank will raise interest rates at its meeting next week, helping moderate swings in the market, said George Rusnak, co-head of global fixed-income strategy at Wells Fargo Investment Institute.

Fed officials have signaled three interest-rate increases in 2018. Mr. Rusnak said he expects the central bank to raise rates this month, but the outlook for path of rate increases next year remains murkier.

While Friday's employment data encouraged some analysts, several said wage growth figures weren't as robust, a sign that inflation remains muted. Wages improved at a subdued pace of 2.5% from a year earlier in November. Average hourly earnings for private-sector workers ticked up 5 cents in November to $26.55, after falling the prior month.

"You're not seeing the pickup in wages that would lead to more spending and therefore more inflation," said Mr. Rusnak.

Inflation is a threat to government bonds because it erodes the purchasing power of the debt's fixed payments and can prompt the Federal Reserve to raise interest rates.

Bond yields have moved in a narrow range in recent weeks, with investors watching progress on a tax overhaul plan in Congress. Analysts have generally expected that progress on tax cuts would lead to higher bond yields, in part because legislation that expands the budget deficit could prompt the government to issue more debt, weighing on the prices. Tax cuts could also spur some growth and inflation, another blow to Treasurys.

Some analysts said tax cuts could have a relatively modest impact on long-term yields if the Treasury Department chooses to fund additional deficits, mostly with short-term debt. Any inflationary effect could also be mitigated if the Fed responds with rate increases.

Write to Gunjan Banerji at Gunjan.Banerji@wsj.com

(END) Dow Jones Newswires

December 08, 2017 17:31 ET (22:31 GMT)