Treasuries Gain Ahead of US Payrolls With Jobs Growth Expected

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(Bloomberg) — Treasuries gained ahead of US employment data that looks set to cement the Federal Reserve’s cautious approach to changing policy.

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Yields slipped around two basis points across most of the curve, taking the policy-sensitive two-year rate down to 3.89%. The move trimmed a small rise this week that’s come amid uncertainty over efforts to reach a peace deal in the Middle East.

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While the war is likely to remain the key driver for markets, investors will still parse Friday’s payrolls data carefully to get a read on the health of the labor market. Economists expect another positive print, with 65,000 jobs added, which would mark the first consecutive gain since May last year.

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“If the US labor market continues to hold up contrary to many expectations at the beginning of the year, at some point, in our view, there would have to be some probability of a hike being priced into the US curve,” said Fredrik Repton, a senior portfolio manager at Neuberger Berman.

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Longer term US yields also slipped back after breaking above 5% on the 30-year tenor this week, as investors locked in rates trading around multi-year highs. That threshold, breached because of concerns over inflation and the possibility of Fed interest-rate hikes, was viewed by some as a “line in the sand” for the market.  

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Fed pricing has shifted in a more hawkish direction in recent weeks, as the energy shock from the war ripples through global supply chains. Swaps imply interest rates will remain in a 3.5% to 3.75% range this year, unchanged from a week ago, and a one-in-three chance of a quarter-point hike by the middle of next year.

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The US 10-year yield was two basis points lower at 4.37%, in line with where it started the week. Last month’s payroll numbers — which rose by 178,000 to a 15-month high — did sway the Treasury market. 

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“The status quo is that labor market conditions appear stable despite some lingering signs of fragility,” said Vail Hartman, strategist at BMO Capital Markets. “Even the doves have softened their calls for rate cuts and Powell has indicated that the center of the Committee is moving toward a more neutral stance on the future path of policy.”

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—With assistance from James Hirai.

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