Treasuries outlook: yield curve flattens as jobs data keeps June rate hike open

The US Treasury yield curve flattened on Friday after jobs growth in April rebounded and the unemployment rate fell to a near 10-year low, reinforcing the view that the Federal Reserve is likely to raise interest rates again in June. Nonfarm payrolls jumped by 211,000 jobs last month, the Labour Department said on Friday, well above the monthly average of 185,000 for this year and a jump from the gain of 79,000 in March.
The drop of one-tenth of a percentage point in the unemployment rate took it to its lowest level since May 2007. The decline reflected both an increase in hiring and people leaving the labour force. The jobs gains beat economists' expectations of 185,000 additions, though a downward revision for March offset some of the increase. "The two-month change in payrolls was negligible," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York.
"It marginally makes the Fed more likely to hike in June," Kohli said. "The curve tends to flatten when the Fed gets more hawkish." Benchmark 10-year notes gained 2/32 in price to yield 2.35 percent, down from 2.36 percent on Thursday. The yield curve between two-year notes and 10-year notes flattened to 103 basis points, from 105 basis points before the data.
Expectations of a rate hike in June increased after the Fed on Wednesday downplayed weak first-quarter economic growth as transitory and emphasized solid inflation and the strength of the labour market. Futures traders are pricing in an 81 percent chance of a June rate hike, up from 79 percent before the jobs data, according to the CME Group's FedWatch Tool. Fed Chair Janet Yellen spoke on challenges for women in the workplace on Friday but did not address monetary policy.
St. Louis Federal Reserve Bank President James Bullard said that the US central bank has interest rates right where they should be, but should start trimming its massive balance sheet in the second half of the year. Investors are also preparing for the Treasury Department to sell $62 billion in coupon debt next week, including $24 billion in 3-year notes, $23 billion in 10-year notes and $15 billion in 30-year bonds.