TREASURIES-Yields fall as stagnant wages ease inflation fears

Fri Aug 1, 2014 11:20am EDT

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(Adds quote, details on yield curve, updates prices)
    * Yields fall after data shows wages flat in July
    * Data offsets inflation fears from labor costs increase on
Thursday
    * Yield curve steepens as Fed seen having more time before
hike

    By Karen Brettell
    NEW YORK, Aug 1 (Reuters) - U.S. Treasuries yields dropped
on Friday after the U.S. government reported that employers
added 209,000 jobs in July, fewer than expected, and that wage
growth was stagnant in the month.
    Yields have risen since strong growth of gross domestic
product for the second quarter, reported on Wednesday,
buttressed sentiment that the economy is gaining momentum.
    Yields rose further on Thursday on inflation fears after
data showed U.S. labor costs rose the most in more than 5-1/2
years in the second quarter, a sign that a long-awaited
acceleration in wage growth may be imminent.  
    Data on Friday, however, showed that average hourly earnings
rose only one cent. The figure is closely monitored as a
potential signal of reduced slack in the labor market that could
prompt the Fed to raise rates. 
    "The market was running scared after yesterday's
outperformance of the employment cost index," said Gennadiy
Goldberg, an interest rate strategist at TD Securities in New
York. "Overall, it's a pretty positive report. The only really
disappointing part of it is wages, and that should help calm the
market." 
    Benchmark 10-year notes were last up 11/32 in
price to yield  2.52 percent, down from 2.58 percent before the
jobs data was released.
    Intermediate-dated debt, which is the most sensitive to
interest rate expectations, outperformed and the yield curve
steepened as investors unwound bets that had sent the curve to
its flattest levels in five-years. 
    Tame inflation is seen as giving the Federal Reserve more
time to continue its stimulus before raising interest rates,
which many see as likely to occur next year.
    "The number gives the Fed a little bit more credibility and
a little bit more time, which is why you're seeing the unwind of
flatteners," said Sean Murphy, a Treasuries trader at Societe
Generale in New York.
    The yield curve between five-year notes and 30-year bonds
 steepened to 162 basis points, and is up from a
five-year low of 149 basis points on Wednesday.

 (Editing by Nick Zieminski)
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