Yields on long-term US Treasurys extended recent gains Friday after new data presented a mixed picture of the labor market.
Yields, which rise when bond prices fall, climbed in the overnight session but fell just before the release of the nonfarm labor report. They then bounced around after the data was reported before rebounding to surpass overnight highs.
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friday’s climb extend the previous day’s surge, which caught many investors off guard. Just a day earlier, Federal Reserve Chairman Jerome Powell had lifted both stock and bond prices by saying Fed officials weren’t actively considering a future interest-rate increase of three-quarters of a percentage point.
The yield on the benchmark 10-year US Treasury note settled at 3.124%, up from 3.066% Thursday, to its highest close since November 2018 and near its highest level in more than a decade.
The move came after the Labor Department said the economy added 428,000 jobs in April, above analysts’ expectations for a 400,000 increase. Average hourly earnings rose just 0.3%, below estimates of a 0.4% gain. Earnings in March, however, were revised higher so that the year-over-year increase in April matched expectations for a 5.5% gain.
Bond investors have been parsing measures of worker pay because rising wages are seen as a crucial long-term driver of overall inflation. Rapidly rising consumer prices have driven bond yields sharply higher this year by lifting expectations for how high the Fed will raise interest rates over the next year in an effort to control inflation.
Investors “are not really convinced of anything at the moment,” said Jim Vogel, interest-rates strategist at FHN Financial.
Investors, he said, initially seized on some aspects of the jobs report that justified lower yields, such as the monthly increase in earnings. Then they found other aspects that justified higher yields, including a decline in the labor-force participation ratewhich some could see as adding to inflation pressures.
Treasury yields are largely determined by the average short-term interest rate that investors expect over the life of a bond. As it stands, interest-rate derivatives show that investors expect the Fed’s benchmark rate to rise to nearly 3.5% next year from its current target range between 0.75% and 1%.
Some Treasurys rally Friday. The yield on the two-year Treasury note settled at 2.696%, unchanged for the week. That was down from 2.722% at Thursday’s close and 2.834% Wednesday just before Mr. Powell’s comments.
The divergence between short- and longer-term yields reflects the differing effects that a less aggressive series of rate increases would have on different types of bonds, some analysts said.
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While short-term yields are extremely sensitive to the near-term interest-rate outlook, longer-term yields can sometimes rise when it looks like the Fed is going to be more cautious about taming inflation.
Such an approach could mean the Fed may need to raise rates higher over the long term if it allows inflation to become entrenched in the economy. At the same time, the approach could also reduce the odds of a recession and subsequent rate cuts needed to revive the economy—creating another rationale for higher long-term yields.
Daniela Mardarovici, co-head of multisector fixed income at Macquarie Asset Management, said a widening gap between short- and long-term yields over just a few sessions shouldn’t be overinterpreted.
Still, she said, the overall impression that investors got from Mr. Powell on Wednesday was “a sense of hesitation” about just how quickly the Fed should raise rates, and “that hesitation,” she added, “is what appears to be priced in the market.”
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