Treasury yields held their ground on Friday, but fell slightly for the week, after a key report on U.S. employment showed the unemployment rate fell to its lowest since 2000 even as wage growth was muted.
How did Treasurys perform?
The 10-year Treasury note yield was unchanged at 2.946%, leaving the weeklong decline at 1.3 basis points. The 30-year bond yield shed 0.7 basis point to 3.116%, contributing to a 1.1 basis points weekly fall.
The 2-year note yield the most sensitive to shifting expectations for monetary policy, rose by 1.6 basis points to 2.498%, with a weekly decline of 1.5 basis points.
The gap between the 2-year and 10-year Treasury notes, often considered the heart of the yield curve, stood at 44.8 percentage points on Friday.
Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping investors on edge. An inverted yield curve has often preceded a recession.
Bond yields fall as prices rise, and vice versa.
What drove the market
Investors highlighted the mixed signals given by the nonfarm-payrolls report, offering fodder for both the monetary doves and the hawks. The economy added around 188,000 new jobs in April, matching the increase of 188,000 new jobs forecast in a MarketWatch survey of economists. This pushed unemployment rate to 3.9%, the lowest since Clinton’s presidency.
That could suggest the economy is reaching closer to full employment, giving the Federal Reserve the impetus to push up the rate increase trajectory.
At the same time, the weak wage growth numbers suggested the Fed should maintain its gradual pace of rate increases. The report showed average hourly earnings rose 0.1%, below expectations for a monthly rise of 0.2%. Inflation tends to be bearish for bonds because it chips away at the value of fixed payments. Hotter inflation could push yields higher as investors sell bonds.
Some analysts said the average hourly earnings number had no correlation with inflation, and that traders may have used the rally to sell bonds for a dearer price.
An interest-rate increase by the U.S. central bank at its next meeting in June seems nearly certain. The Federal Open Market Committee’s Wednesday policy statement acknowledged inflation was heading toward the central bank’s annual 2% target, with the Fed’s preferred inflation gauge, the personal-consumption expenditures index for March, rising to a 12-month rate of 2% for the first time in a year.
Bonds traders keyed in on language from the Wednesday policy statement that suggested the inflation target was “symmetric,” with some market participants speculating that conferred a dovish tone to the update. Economists said this could indicate the central bank may be willing to allow inflation slightly overshoot 2%, without sparking an accelerated pace of rate increases.
Meanwhile, trade talks between the Beijing and Washington, so far, have been “very good,” according to Treasury Secretary Steven Mnuchin but not agreement has reached in a tit-for-tat tariff battle between the counterparts.
Fed speakers in focus
What did strategists say?
“Hawks will nonetheless point to the fall in the unemployment rate as justifying more aggressive policy action, doves will point to the still modest pace of wage growth as arguing against, and the Fed will continue to take the long view—their view is not going to change based on today’s print,” said Eric Winogrand, AB senior economist.
“In addition to the short-term volatility in the wage data, the larger problem is that they do not seem to accurately reflect what is going on in the labor market. Anecdotal reports, particularly soundings from placement industry executives, and business surveys clearly point to accelerating wages,” said Stephen Stanley, chief economist at Amherst Pierpont Securities.
What other assets were in focus?
The 10-year German bond yield often used as a proxy for the health of the eurozone economy, rose 1.2 basis point to 0.544%, according to Tradeweb data.