Treasuries outlook: short-dated yields rise on solid jobs, factory data

US short-dated Treasury yields rose on Friday from one-month lows in choppy trading as stronger-than-expected labour and factory data in March supported the view the Federal Reserve would raise interest rates later this year. Another solid US payrolls report coupled with figures suggesting a recovery among manufacturers that have struggled due to a strong dollar and weak overseas demand were mitigated by the cautious rate-hike view expressed by Fed Chair Janet Yellen earlier this week.
While a possible interest rate hike looms in the coming months if the economy expands further, the March jobs and manufacturing data were not robust enough to push the US central bank to quicken its projected rate hike path, analysts and investors said. Friday's jobs and factory data "show that the US economy continues to motor on at a decent rate, but doesn't really move the needle on a monetary policy perspective, particularly after the communication we had from Yellen recently," said Luke Bartholomew, investment manager on the global macro desk at Aberdeen in London.
On Friday, the US Labour Department said US employers hired 215,000 workers, while average hourly earnings grew 0.3 percent last month. The Institute for Supply Management said its index of national factory activity rose to 51.8 from 49.5 in February. The Treasuries market was off to a wobbly start in the April-June quarter following its best quarter in 4-1/2 years.
Two-year Treasury yield, which is most sensitive to changes in traders' view on Fed policy, last traded up 4 basis points at 0.772 percent. It touched a one-month low of 0.725 percent on Thursday. Longer-dated Treasuries fared better than shorter maturities as Friday's encouraging economic data stoked "curve flatteners," where traders favour longer-dated debt based on the view the Fed would raise policy rates higher. "My base case is still two rate hikes this year," said Todd Hedtke, chief investment officer at Allianz Investment Management in Minneapolis.
Interest futures implied traders see almost no chance the Fed would raise rates at its policy meeting this month. They placed a 65 percent of a rate hike by year-end, up from 55 percent on Thursday, according to CME Group's FedWatch program. The US benchmark 10-year Treasury note was unchanged in price for a yield of 1.786 percent. The 10-year yield touched a one-month low of 1.762 percent earlier Friday and later reached a session high of 1.814 percent.