Bond Market Shakes Off Jobs News

The U.S. economy added more than 200,000 new jobs last month, yet the U.S. government bond market shook it off.

The yield on the benchmark 10-year Treasury note was 2.377% in recent trading, compared with 2.39% right before the nonfarm jobs release, according to Tradeweb. The yield remained higher than 2.369% Thursday. Yields rise as bond prices fall.

The bond market's subdued reaction underscores that bond investors focus more on inflation readings. Average hourly earnings for private-sector workers rose 2.5% in June compared with a year earlier, little changed from prior months. Tepid wage inflation has been a puzzle for Fed officials as the labor market is approaching full employment.

Inflation chips away investors' purchasing power on their bond investments over time and is seen by investors as a main threat to long-term government debt. Fed Chairwoman Janet Yellen said recent slowing inflation readings would be transitory, yet some money managers say Ms. Yellen's assessment may be wrong. Investors who expect inflation to stay muted don't expect a big rise in long-term Treasury bond yields, and some believe higher yields would be a buying opportunity.

"The lack of inflation remains a hurdle for the Fed to raise interest rates," said Gary Pollack, head of fixed-income trading at Deutsche Bank AG's private wealth management unit. "It would be hard for bond yields to rise sharply from here unless we see a clear trend of higher inflation."

Inflation isn't the sole factor affecting long-term bond yields, as reflected by the sudden rise in yields over the past week following months of slides. A key factor pushing up yields has been worries that major central banks might soon dial back monetary stimulus support given signs of broad improvement in the global economy.

The 10-year Treasury yield dropped to this year's low of 2.135% on June 26. Since then, it has risen by more than 0.2 percentage point, highlighting investors' vulnerability to a shift in central bank policy outlook.

Central banks' easy money policy, highlighted by large bond purchases, has played a big role in driving down global bond yields to historically low levels following the financial crisis. Analysts have warned that the value of government bonds would fall when central banks reduce support.

Looming new debt sales may weigh down bond prices too, said some traders. A $24 billion sale of three-year Treasury notes is due next Tuesday, followed by $20 billion sale of 10-year notes next Wednesday and $12 billion sale of 30-year bonds next Thursday.

Ms. Yellen is scheduled to testify before Congress next Wednesday on monetary policy, which may also affect the bond market.

Bond yields remain at very low levels from a historical standpoint. The 10-year Treasury yield is still below 2.446% settled at the end of last year. In mid-March, the yield traded above 2.6%.

Now debate is growing among investors about whether the current bout may soon fade or gain more momentum.

In May 2013, then Fed Chairman Ben Bernanke said that the central bank could start cutting bond buying in coming months, which caught some investors off guard, sending the 10-year Treasury yield soaring and causing a record pace of outflows from bond funds.

Analysts said central banks would try to avoid a repeat of that episode in the bond market this time because a big rise in yields would undercut the economic growth outlook.

The Bank of Japan took actions Friday aiming to contain higher bond yields. The yield on the 10-year Japanese government bond rose to a five-month high of 0.105% early Friday, prompting the BoJ to announce a fixed-rate bond-buying operation, which sent yields back down to around 0.084%.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

July 07, 2017 10:23 ET (14:23 GMT)