* US Treasury yields fall then rise after payrolls report
* 2-year yield fell to lowest level in two weeks before rising
* September payrolls rise 29,000 against expectations for 90,000
* LSEG data shows traders still see an 86% chance of December Fed hike
* Benchmark 10-year Treasury yield on track for fifth weekly advance in a row
(Updates numbers to late afternoon)
Oct 2 (Reuters) – US Treasury yields reversed their earlier declines on Friday as investors digested September’s weaker-than-expected jobs report, which tempered bets for Federal Reserve interest rate hikes.
Last month’s nonfarm payrolls report showed on Friday that the US economy added 29,000 jobs compared with expectations for 90,000. And the Labor Department reported a September unemployment rate of 4.2% compared with economist expectations for 4.1%. Job growth for August was revised down to 133,000 from a previously reported 162,000 surge.
While investors initially reacted to the report by buying Treasuries across the board, selling resumed later, highlighting the many sources of stress currently weighing on this market, ranging from solid economic growth to heavy debt issuance to inflation fears.
Traders were last pricing in a roughly 80% probability that rates would be unchanged at this month’s meeting compared with 74% ahead of the data. Expectations for a December hike fluctuated around an 86% probability, according to LSEG data.
“Today’s news was okay in so far as it means the economy isn’t roaring. But how good is that? It’s fine in so far as it takes the short-term rate hike off, but there is a concern over the economy, there is a concern over inflation. So cautious optimism is kind of where people are,” said Robert Bernstone, head of trading at SummitTX Capital in New York.
As for the reversal in yields after the initial reaction, Molly Brooks, US rates strategist for TD Securities, pointed to fluctuations in Fed policy expectations during the session and profit taking and repositioning ahead of the weekend.
“What it does for the Fed is it decreases the worry that potentially we were going to see a labor market re-acceleration, which would add on to their concerns with inflation,” said Brooks.
“If the labor market is in more of a steady state and it’s not going to be contributing to the mandate for them to hike, then that makes their focus more on just the inflation mandate and this kind of decreases the urgency of it.”
For the week, 2-year yields were down 3.3 basis points for their first weekly decline since the second week in August. Benchmark 10-year yields were on track for a 10-basis-point increase for the week, which would mark their fifth consecutive weekly gain. Yields on 30-year bonds were poised for a weekly gain of 13.2 basis points in their second advance in a row.
On Thursday, investors had reversed an early selloff in US Treasuries and yields ended the day lower after long-term yields had surged to their highest level in 24 years following economic data.
Thursday’s decline had interrupted a seven-day advance in 10-year and 30-year yields and also sent 2-year yields lower. But while Friday’s report brought some buyers who were sitting on the sidelines back into the market, Brooks said it was too soon to assume that the bond selloff was over.
The report helped “in terms of preventing an extreme selloff,” said Brooks, but she added that the bond market is “definitely not out of the woods.”
The yield on benchmark US 10-year notes rose 4.72 basis points to 5.281%, after falling earlier to 5.1570%, which was its lowest level in a week.
The 30-year bond yield rose 2.91 basis points to 5.6321% after dropping to 5.5523% shortly after the jobs report.
The 2-year note yield, which typically moves in step with interest rate expectations for the Federal Reserve, rose 3.98 basis points to 4.827%. After the labor market news it had fallen to 4.6934%, which was its lowest point in two weeks.
“The knee-jerk initial read on the headline looked soft, but there were seasonal factors,” said Carol Schleif, chief market strategist at BMO Private Wealth, noting a late Labor Day holiday and a later-than-usual start of the new school year.
“Blending last month’s above average and this month’s softer probably leads to more insightful answers,” said Schleif, who sees the potential for one or more Fed rate hikes in the next six to nine months.
A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 45.2 basis points, slightly steeper than where it was at the end of Thursday’s session.
(Reporting by Sinead Carew; Editing by Andrea Ricci and Aurora Ellis)
