US medium- and long-dated Treasuries prices rose on Friday, while prices for short-dated notes were mostly flat, after US monthly employment data bolstered the case for the Federal Reserve to hike interest rates later this month. Nonfarm payrolls increased 173,000 last month, a slowdown from July's upwardly revised gain of 245,000 and the smallest rise in five months, the Labor Department said. Economists had expected a gain of 220,000 jobs in August.
Payrolls data for both July and June, however, were revised to show 44,000 more jobs created than previously reported, while average hourly earnings increased 8 cents and the workweek rose to 34.6 hours. Analysts said the average hourly earnings and workweek increases, as well as the drop in the jobless rate to 5.1 percent, put more pressure on the Fed to raise rates at the central bank's September 16-17 policy meeting.
"The shape of the curve and how investors are buying the longer end is partly a reflection of the view that the Fed is increasingly likely to raise rates," said Michael Temple, portfolio manager at Pioneer Investments in Boston. Analysts said the "curve flattening" trade showed short-dated note prices, which are most vulnerable to Fed rate hikes, little changed while long-dated bond prices rallied since the lower inflation expected to come with rate hikes is beneficial to those bonds. Lower inflation preserves the value of long-dated bonds' interest payouts.
Benchmark 10-year yields hit a more than one-week low of 2.11 percent, while 30-year yields hit their lowest level since August 31 at 2.88 percent. Two-year note yields were last little changed on the day at 0.7 percent. While analysts said the Treasury market reacted on the view that a September rate hike was more likely, data on fed funds futures contracts from CME Group's FedWatch suggested less than a 20 percent probability of a September rate hike and a bit more than 50 percent for a hike in December.
"The reaction in the Treasury market seems to be exaggerated compared to some of the money market instruments that track fed funds probabilities," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia. Treasuries maturing between 2-30 years were set to post modest declines for the week after rising the previous week.