By Ben Eisen, MarketWatch
Shorter-term debt leads the way as yields fall and curve
steepens
NEW YORK (MarketWatch) -- Treasury prices surged Friday after a
weaker-than-expected jobs report soothed concerns that the Federal
Reserve would surprise the market by pulling back on its low-rate
policies.
The Labor Department report showed 209,000 new nonfarm jobs were
created in July, below expectations of 235,000. The jobless rate
rose to 6.2% from 6.1%. Average hourly earnings were unchanged,
while the participation rate rose slightly.
The 10-year Treasury note (10_YEAR) yield, which falls as prices
rise, was down 6.5 basis points on the day at 2.494%, according to
Tradeweb. The fall in benchmark yields walks back a jump on
Wednesday after a strong report on economic growth. The yield rose
3 basis points on the week.
The gulf between short- and long-term Treasury yields widened on
Friday, suggesting that traders were revising their expectations
about when the central bank will raise rates.
A strong report on gross domestic product on Wednesday stoked
fears that Fed Chairwoman Janet Yellen and the rest of the policy
committee would consider rate hikes. But the jobs report has calmed
those expectations a bit, according to Jim Kochan, chief
fixed-income strategist at Wells Fargo Asset Management.
"Part of the reason for the selloff in Treasurys we had seen
this week was the GDP report. With this report, some of those fears
go away," he said, adding that Yellen's, "contention was that wage
increases would signal that there is some degree of tightness in
the labor market, and we didn't get any of that in the jobs
report."
The 5-year note (5_YEAR) yield plunged 10 basis points to 1.664%
and the 30-year bond (30_YEAR) yield fell 3 basis points to 3.281%.
The differential between them increased by 7 basis points to 1.62
percentage points.
Traders now expect the first rate hike to occur in July 2015,
one month later than before the jobs report, according to CME
FedWatch, which tracks fed funds futures contracts that are used to
bet on rate hikes.
Other factors influenced the yield curve as well.
"The push and pull on the bond market is the safety trade, which
may be more geopolitically driven, and the inflation trade," said
Scott Clemons, chief investment strategist at Brown Brothers
Harriman Private Banking.
Investors digested an otherwise packed day for economic news.
Here's what else was on the docket:
* Two Fed officials spoke, suggesting some disagreement among
the hawkish members about when the central bank should begin hiking
rates. Richard Fisher, the president of the Dallas Fed, said he
thought the economy was moving the Fed closer to the timing of rate
hikes. On the other hand, Charles Plosser, the president of the
Philadelphia Fed, said he thought the Fed should be moving
quicker.
* The Institute for Supply Management manufacturing index jumped
to 57.1% in July. form 55.3% in June, the fastest pace in over
three years. That beat economist forecasts of 56%.
* Consumer spending rose by 0.4% in June while personal income
rose by 0.4%. The PCE index climbed 1.6% during the 12 months ended
in June.
* The University of Michigan/Thomson Reuters consumer sentiment
index's final reading dropped in July.
* The Markit final U.S. manufacturing PMI slipped in July after
a two-year high in June.
* Construction spending dropped 1.8% in June, below a 0.3%
increase.
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