Yields jump, curve flattens

US Treasury yields jumped on Friday, and the yield curve flattened after a report showed that US job growth rose solidly in January and wages rebounded strongly, raising some bets that the Federal Reserve may act sooner to raise interest rates. Nonfarm payrolls increased by 257,000 last month, the US Labour Department said on Friday. Data for November and December were revised to show 147,000 more jobs created than previously reported.
Hourly wages increased 12 cents last month for a 2.2 percent increase from a year earlier, the largest such gain since August. They had fallen 5 cents in December. "By any measure, this was an extremely good report," said Tom Porcelli, chief US economist at RBC Capital Markets in New York. "It adds some additional evidence for those folks wondering what the fate of wages is going to be, that you probably are looking at some modest wage pressures here."
Short- and intermediate-dated debt took the brunt of the selling as some analysts and investors worried that current yields failed to reflect the possibility that the Fed may raise rates in the coming months if employment trends continue. Two-year note yields increased to 0.648 percent from 0.528 percent, their highest since January 7. The 12-basis-point increase was the largest one-day move in nearly five years.
Five-year note yields rose to 1.46 percent from 1.29 percent, the highest since January 9. "With this kind of a number, the Fed can go in the first half of the year," said interest rate strategist Richard Gilhooly of TD Securities in New York. "One more report like this and the Fed will be going earlier." Traders see a 62 percent chance that the first Fed rate hike will come in September, based on CME FedWatch, which tracks such expectations using its Fed funds futures contracts. They put a 47 percent probability on the chance of a July rate hike.
Before the report, traders were betting the Fed would wait until October before raising rates. Short and intermediate-dated notes are the most sensitive to interest rate increases. The yield curve between five-year notes and 30-year bonds was last 105 basis points from 112 basis points before the report. It briefly flattened to 102 basis points. Benchmark 10-year note yields jumped to 1.94 percent, their highest since January 12, from 1.81 percent before the report, and 30-year bond yields increased to 2.51 percent, their highest since January 22, from 2.41 percent.