The US Treasury yield curve was the steepest in one-and-a-half months on Friday after the jobs report for January showed disappointing wage growth, indicating inflation is not rising at a pace that would lead the Federal Reserve to raise rates in the near-term. Nonfarm payrolls increased by 227,000 jobs last month, the largest gain in four months, the Labour Department said.
Average hourly earnings, however, increased only three cents or 0.1 percent and December's wage gain was revised down.
"Most of the disappointment is really focused around the inflation pressures that would presumably force the Fed to act," said Aaron Kohli, an interest rate strategist at BMO Capital Markets in New York.
The yield curve between 5-year notes and 30-year bonds steepened to 120 basis points, the widest since December 14. Five-year notes, which are very sensitive to rate increases, were supported by the payrolls report while long-dated bonds were weighed down by anticipation of new debt issuance next week.
The Treasury Department will sell $62 billion in three-year, 10-year and 30-year debt. Hawkish comments from San Francisco Fed President John Williams on Friday afternoon, however, undid much of the bond rally sparked by the jobs report. The Fed can prepare to raise interest rates this year without knowing details of any new US fiscal policies because inflation is firming and the labour market looks good, Williams said.
Benchmark 10-year notes fell 6/32 in price on the day to yield 2.49 percent, after the yields fell as low as 2.43 percent after the jobs data. Expectations that the Fed could raise rates at its March meeting have fallen since the US central bank gave a more dovish than expected statement after it's meeting on Wednesday. The odds dropped further on the jobs report. "The wage numbers from today definitely takes March off the table for anything from the Fed," said Mary Ann Hurley, vice president in fixed income trading at D.A. Davidson in Seattle. "The Fed has been very, very concerned about weak wage growth."