BOND REPORT: Treasury Yield Curve Steepens After Weaker-than-expected December Jobs Data

By William Watts, MarketWatch Features Dow Jones Newswires

Treasury prices jumped then pulled back in choppy trade Friday that left the yield curve slightly steeper after a weaker-than-expected December jobs report that appeared to slightly dent expectations surrounding the pace of future rate increases by the Federal Reserve.

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What are yields doing?

The yield curve, a line plotting yields across Treasury maturities, steepened in the wake of the data as yields fluctuated.

In recent action, the yield on the benchmark 10-year Treasury note was up 2.3 basis points at 2.478%, while the 2-year Treasury note yield was up just 0.4 basis point at 1.96%. The spread between 2- and 10-year yields is a widely watched measure of the yield curve.

The yield on the 30-year Treasury bond was up 2.9 basis points at 2.815%.

Yields and debt prices move in the opposite direction.

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What's driving the market

Jobs data was in focus Friday. The Labor Department said the U.S. economy added 148,000 jobs in December (http://www.marketwatch.com/story/us-adds-148000-jobs-in-december-2018-01-05) versus an average pace of 232,000 over the past two months. Economists polled by MarketWatch had forecast a rise of 198,000.

Average hourly earnings, which are viewed as more crucial to the direction of the Treasury market, rose 0.3%, in line with expectations. Wage growth is seen as a signal of potential inflation. Higher inflation is seen as a negative for long-dated Treasurys as it undercuts the purchasing power of fixed payments.

What are analysts saying?

"The near-term market reaction on this print is a steepening of the Treasury curve and that makes some sense given that this marginally pushes down near-term pricing of hikes. We don't expect this print to materially deter the Fed as there are two additional [nonfarm payrolls] reads before the March meeting and a new chair on hand," said Aaron Kohli, interest-rates strategist with BMO Capital Markets. "We're also much more focused on the CPI print next Friday as far more relevant to the Fed's reaction function over this year."

"Wages continue to move in the right direction, though at a somewhat slower pace than one would hope for at this point in the cycle. As slack in the labor force continues to diminish, it will accelerate," said Thomas Simons, senior money market economist at Jefferies.

What else is in focus?

The U.S. trade deficit widened 3.2% (http://www.marketwatch.com/story/us-trade-deficit-swells-to-largest-since-january-2012-2018-01-05) in November to $50.5 billion, the largest gap since January 2012. Economists polled by MarketWatch had forecast a $50 billion deficit.

The Institute for Supply Management's nonmanufacturing index fell 1.5 points to 55.9% (http://www.marketwatch.com/story/service-sector-growth-tumbles-in-december-ism-says-2018-01-05) in December, signaling a slowdown in the pace of expansion for services-sector activity. Separately, November factory orders rose a stronger-than-expected 1.3%, topping expectations for a 1.1% expansion.

Meanwhile Philadelphia Federal Reserve Bank President Patrick Harker said he thinks the Federal Open Market Committee will raise rates only twice in 2018 (http://www.marketwatch.com/story/feds-harker-sees-only-two-interest-rate-hikes-in-2018-2018-01-05) versus the panel's median forecast for three rate rises. Harker isn't an FOMC voter this year.

What are other assets doing?

The yield on the 10-year German bond, known as the bund , was at 0.435%, compared with 0.442% on Thursday.

(END) Dow Jones Newswires

January 05, 2018 11:51 ET (16:51 GMT)