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U.S. yields advance broadly as strong payrolls reinforce continued Fed tightening

Fri, 5th Aug 2022 21:25

NEW YORK, Aug 5 (Reuters) - U.S. Treasury yields rose sharply on Friday after data showed the world's largest economy created far more jobs than expected in July, bolstering expectations the Federal Reserve will continue to raise interest rates in the next few meetings to slow inflation.

The rise in U.S. Treasury yields, from two-year notes to 30-year bonds, ranged from 10 to 22 basis points (bps).

A closely watched part of the U.S. Treasury yield curve inverted by as much as -45 bps on Friday, the deepest inversion since August 2000, as investors priced in a 75-bps Fed rate hike next month after the strong payrolls number. The curve was last inverted by -41 bps.

The inversion of this yield curve preceded the last eight U.S. recessions, analysts said.

The latest jobs report, though, suggested that the U.S. economy is nowhere near recession right now.

Data showed U.S. nonfarm payrolls increased by 528,000 jobs last month. The number for June was revised slightly higher to show 398,000 jobs created instead of the previously reported 372,000.

Average hourly earnings, a gauge of wage inflation and a key metric tracked by the Fed, climbed 0.5% after rising 0.4% in June, the data showed. That left the year-on-year increase in wages at 5.2%, compared with forecasts for a 4.9% rise.

"Another very strong payrolls report is going to put the Fed firmly back on their hawkish path," wrote PIMCO economists Tiffany Wilding and Allison Boxer.

"Wage inflation was again firm: a sign that core price inflation will remain sticky despite some relief in food and energy prices over the coming months. A 75-basis-point rate hike in September is now likely to be the base case for Fed officials, as they pull forward additional hikes in 2022 yet again," they added.

U.S. rate futures have priced in a 69% chance of a 75 bps hike, up from about 41% before the payrolls data. Futures traders have also factored in a fed funds rate of 3.57% and additional tightening of around 122 bps by the end of the year.

In afternoon trading, the yield on 10-year Treasury notes was up 15 bps at 2.8287%.

On the week, 10-year yields climbed 18 bps, the largest increase in one month.

U.S. 30-year bond yields rose nearly 10 bps to 3.0605% . It advanced to two-week peaks of 3.106% on the day.

On a weekly basis, 30-year yields were up nearly 9 bps, a one-month high.

At the short end of the curve, the U.S. two-year yield , which typically tracks interest rate expectations, hit a two-week high of 3.25% and was last up 20.7 bps at 3.2442%.

This yield rose 34 bps this week, the biggest weekly rise in about two months.

August 5 Friday 3:49PM New York / 1949 GMT

Price        Current   Net
Yield % Change
Three-month bills 2.4975 2.5476 0.105
Six-month bills 2.9725 3.0587 0.109
Two-year note 99-138/256 3.2422 0.205
Three-year note 99-124/256 3.1849 0.216
Five-year note 99 2.9675 0.192
Seven-year note 98-52/256 2.9113 0.175
10-year note 100-96/256 2.8305 0.154
20-year bond 99-164/256 3.2746 0.130
30-year bond 96-80/256 3.0646 0.104

Last (bps) Net
U.S. 2-year dollar swap 25.25 -2.00
U.S. 3-year dollar swap 8.25 -2.00
U.S. 5-year dollar swap 3.50 -0.50
U.S. 10-year dollar swap 5.75 -0.25
U.S. 30-year dollar swap -30.25 -0.50

(Reporting by Gertrude Chavez-Dreyfuss; Editing by David Goodman, David Holmes and Cynthia Osterman)

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