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

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

What did yields do?

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

The yield on the benchmark 10-year Treasury note rose 2.4 basis points to 2.476%, 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 rose 2.8 basis points to 2.811%.

Yields and debt prices move in the opposite direction.

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 ( 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."

Ward McCarthy, chief financial economist at Jefferies, agreed that consumer price inflation data on Jan. 12 is likely to be more influential than jobs data.

"Everyone seems to be in agreement that the economy and the labor market are in great shape, but there is still a lot of uncertainty and disagreement about the outlook for inflation. We have supply coming up this week as well," he said, in a note. "

What else is in focus?

The U.S. trade deficit widened 3.2% ( 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% ( 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 ( versus the panel's median forecast for three rate rises. Harker isn't an FOMC voter this year.

Cleveland Fed President Loretta Mester, who is a 2018 FOMC voter, told CNBC late Friday that the jobs report was strong. "I think we're basically at maximum employment from the view of monetary policy," she said. "But that doesn't mean it triggers a necessary reaction."

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 10, 2018 12:09 ET (17:09 GMT)