Bond Report: U.S. government bond yields slip after tepid wage growth in April jobs report

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Treasury yields slipped Friday morning after a key report on U.S. employment showed wage growth was muted even as the unemployment rate fell to its lowest since 2000.

Fixed-income investors will also keep an eye on a parade of Fed speakers set to talk later Friday, some in the evening, as well as global trade negotiations between China and the U.S. Friday is the final day of this round of discussions in Beijing, aimed at cooling trade-war tensions.

How are Treasurys performing?

The 10-year Treasury note yield TMUBMUSD10Y, -0.63% fell 2.6 basis points to 2.918%, while the 30-year bond yield TMUBMUSD30Y, -0.34% shed 2.3 basis points to 3.098%. The 2-year note yield TMUBMUSD02Y, +0.18% the most sensitive to shifting expectations for monetary policy, edged off by 2 basis points to 2.464%.

The gap between the 2-year and 10-year Treasury notes, often considered the heart of the yield curve, stood at 45 basis points early Friday.

Concerns that the yield curve could eventually invert, with short-dated yields moving above long-dated yields, is keeping investors on edge. An inverted yield curve has often preceded a recession.

Bond yields fall as prices rise, and vice versa

What’s driving the market

After Wednesday’s Fed policy statement offered few signals that would dissuade investors from expecting a rate hike in June, investors in government paper scanned through the nonfarm-payrolls report. The economy added around 188,000 new jobs in April, matching the increase of 188,000 new jobs forecast in a MarketWatch survey of economists. This pushed unemployment rate to 3.9%, the lowest since Clinton’s presidency.

See: U.S. adds 164,000 jobs in April, unemployment falls to 3.9%.

Yields extended their early dip after the weak wake growth numbers suggested investors would still have to wait for tight labor markets to translate into inflationary pressures. The report showed average hourly earnings rose 0.1%, below expectations for a monthly rise of 0.2%. But some analysts said the average hourly earnings number had no correlation with inflation, and that traders could use the rally to sell bonds for a dearer price.

Inflation tends to be bearish for bonds because it chips away at the value of fixed payments. Hotter inflation could push yields higher as investors sell bonds.

An interest-rate increase by the U.S. central bank at its next meeting in June seems nearly certain but details on wages and other measures of the labor market may offer clues on whether the Fed will need to pick up the pace of increases from the two further anticipated in 2018.

The Federal Open Market Committee’s Wednesday policy statement acknowledged inflation was heading toward the central bank’s annual 2% target, with the Fed’s preferred inflation gauge, the personal-consumption expenditures index for March, rising to a 12-month rate of 2% for the first time in a year.

Bonds traders keyed in on language from the Wednesday policy statement that suggested the inflation target was “symmetric,” with some market participants speculating that conferred a dovish tone to the update. Economists said this could indicate the central bank may be willing to allow inflation slightly overshoot 2%, without sparking an accelerated pace of rate increases.

Meanwhile, trade talks between the Beijing and Washington, so far, have been “very good,” according to Treasury Secretary Steven Mnuchin but not agreement has reached in a tit-for-tat tariff battle between the counterparts.

Fed speakers on deck
  • San Francisco Fed President John Williams is set to appear at a monetary policy conference at the Stanford University’s Hoover Institution at 3 p.m.
  • Fed Vice Chair for Supervision Randal Quarles steps up at 5:30 p.m. also at the Stanford event to talk about liquidity regulation and the Fed’s balance sheet.
  • Dallas Fed President Rob Kaplan, Atlanta Fed President Raphael Bostic and Kansas City Fed President Esther George are all slated to take part in a panel discussion at the conference at 8 p.m. Eastern
What are strategists saying?

“Once again, lower unemployment rates are not translating into anything that resembles aggregate wage pressures that traders can count on,” said Jim Vogel, interest-rate strategist for FTN Financial.

What other assets are in focus?

The 10-year German bond yield TMBMKDE-10Y, +0.32% often used as a proxy for the health of the eurozone economy, was at 0.526%, compared with 0.537% in the prior session, according to FactSet data.