BOND REPORT: 30-year Treasury Yield Hits 6-week High After Solid Jobs Report

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

Treasury yields climbed on Friday to extend the week's gains after a better-than-expected jobs report offered support to the Federal Reserve's plan to raise interest rates and begin shrinking its $4.5 trillion balance sheet as early as September.

The 30-year Treasury bond's yield, climbed 3 basis points to 2.935%, its highest level since May 23. Friday's action added to a weekly jump of more than 10 basis, marking its largest single-day gain in more than two months on Thursday.

The 10-year Treasury yield rose 2.3 basis points, contributing to the weekly gains of 9.4 basis points. While, the 2-year note, the most sensitive to shifting tides in the monetary-policy outlook ticked 0.4 basis point higher to 1.410%, but high enough to notch its third highest level this year.

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

Long-dated yields, in particular, climbed 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.

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)

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.

"The bottom line is this number is not going to change the Fed's position in rates," said Tom di Galoma, managing director of Treasurys trading, at Seaport Global Securities.

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.

Yields have risen sharply this week to continue the selloff in bonds, 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. The Federal Reserve said they forecast a gradual increase in interest rates (http://www.marketwatch.com/story/fed-sticks-to-script-ahead-of-yellens-testimony-on-capitol-hill-2017-07-07) in its semiannual monetary report, which comes ahead of Fed Chairwoman Janet Yellen's testimony on Capitol Hill next week.

"The perception in the shift of central bank policy reflects the deflation story is behind us. Now that signals less accommodation is going to happen. They've taken the foot off the accelerator," said Kathy Jones, senior fixed income strategist at the Schwab Center for Financial Research.

That has put pressure on long-dated bonds. The yield on 10-year German paper was mostly unchanged at 0.570%, its highest in about 18 months.

Elsewhere, the yield on the 10-year Japanese government bond 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 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.

Other than Yellen's testimony, traders will look forward to next week's release of the consumer-price index reading for June. The inflation number could clarify the Fed's thinking on how it should tighten policy in the coming September meeting.

(END) Dow Jones Newswires

July 07, 2017 17:08 ET (21:08 GMT)