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Bond Report: Treasury yields surge after blockbuster U.S. July jobs data

Treasury yields jumped sharply Friday after a much stronger than expected U.S. July jobs report stoked expectations the Federal Reserve will continue to aggressively raise interest rates to contain inflation.

What yields are doing

The yield on the 2-year Treasury note

rose 21.3 basis points to 3.248% at 3 p.m. Eastern on Friday and has risen for five of the past six trading days.

The 10-year Treasury note yield

rose 16.4 basis points to 2.838%

The 30 year Treasury bond yield

rose 8.9 basis points to  3.065%.

What’s driving the market

The U.S. economy added 528,000 new jobs in July and the unemployment rate fell to pre-pandemic levels, though the robust report could add to inflation worries and push interest rates even higher. Economists polled by The Wall Street Journal had forecast 258,000 new jobs.

The unemployment rate slipped to 3.5% from 3.6%, the government said Friday, matching the lowest rate since the late 1960s, while average hourly earnings rose 0.5%.

Fed-funds futures traders priced in a 67.5% probability of a 75 basis point rate increase in September, up from 34% on Thursday.

Meanwhile, geopolitical tensions remain an undercurrent for markets. China conducted “precision missile strikes” Thursday in waters off Taiwan’s coasts as part of military exercises that have raised tensions in the region to their highest level in decades following a visit by U.S. House Speaker Nancy Pelosi to the island.

What analysts say

“For the Fed, the combination of strong payroll and wage growth coupled with continued declines in participation and the unemployment rate is a clear signal that tightening will continue to be appropriate,” Ellen Zentner, Chief US Economist at Morgan Stanley, wrote in a note. “It also strengthens the belief espoused by FOMC members that the economy is clearly not in recession, supporting the Fed’s steep tightening path through the rest of the year. “

“At face value, today’s strong jobs report continues to highlight the resiliency of the U.S. consumer, even with the specter of impending recession approaching,” Jason Pride, Chief Investment Officer of Private Wealth at Glenmede Investment Management, said. “However, it is not quite what the Fed was hoping to see, particularly the acceleration of average hourly earnings to a 0.5% month-over-month growth pace. Signs of a dreaded “wage-price spiral” should cause the Fed concern that their price stability goal is far from achieved and perhaps at further risk than the market appears to be discounting.”

“Overall, a solid number consistent with the Fed’s hawkish ambitions. If the FOMC meeting was tomorrow — this would make a 75 bp hike the path of least resistance. Alas, there is still a lot of data between now and the September 21st meeting,” wrote Ian Lyngen and Benjamin Jeffery, strategists at BMO Capital Markets.

Hear from Ray Dalio at the Best New Ideas in Money Festival on Sept. 21/22 in New York. The hedge-fund pioneer has strong views on where the economy is headed.

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