Treasury yields jumped Friday, erasing what had been weekly declines for 2- and 10-year notes, after a much stronger-than-expected U.S. January jobs report clouded investor expectations for the Federal Reserve to end its interest rate hiking cycle in coming months.
What yields did
- The yield on the 2-year Treasury note TMUBMUSD02Y, 4.303% jumped 20.9 basis points to 4.299%, leaving it up 9.4 basis points for the week. Yields and debt prices move opposite each other.
- The 10-year Treasury note yield TMUBMUSD10Y, 3.523% jumped 13.5 basis points to 3.531%, for a 1.4 basis point weekly rise.
- The 30-year Treasury bond yield TMUBMUSD30Y, 3.616% rose 7.2 basis points to 3.626%, leavingit down 0.6 basis point on the week.
Market drivers
The U.S. economy added 517,000 jobs in January, far exceeding economist expectations for a rise of 187,000, while the unemployment rate fell to 3.4%, its lowest since 1969. Average hourly earnings rose 0.3%, in line with expectations.
See: U.S. jobs report shows blowout 517,000 gain in employment in January
In another round of upbeat economic data, the Institute for Supply Management said Friday its services index rebounded to 55.2% in January after falling into contraction territory at the end of last year. Numbers over 50% indicate an expansion in activity.
Fed-funds futures on Friday afternoon reflected a 99.6% probability the Fed would raise the rate by 25 basis points to a range of 4.75% to 5% at the conclusion of its next policy meeting on March 22, up from an 82.7% probability on Thursday, according to the CME FedWatch tool.
For May, investors now see a 61.3% chance of another quarter-point rise to 5% to 5.25%, the level which the Fed has signaled is its expectation for a peak. On Thursday, investors saw just a 30% chance of a quarter-point rise in May.
Yields had previously fallen this week after the Federal Reserve, Bank of England and European Central Bank delivered another round of interest rate hikes but failed to dissuade investor expectations that an aggressive cycle of increases is nearing its end.
What analysts say
“Markets were whipsawed this week by a bullish reaction to central bank policy decisions on Wednesday and Thursday followed by a large selloff in response to strong data on Friday. In the end, the Treasury curve finished the week flatter,” said John Canavan, lead analyst at Oxford Economics, in a note.
Traders next week will “need to contend with the coming week’s Treasury refunding supply after the post-jobs report selloff, which may limit any near-term Treasury market rebound,” he wrote. “That has the potential to keep yields in the ranges that have been holding since early January. That would leave the 10-year yield trading around the 3.50% level, the 5-year yield around 3.55%, and the 2-year yield around 4.20%.”