(Adds quotes, July performance of long bonds, updates prices)
* Yields fall after data shows wages flat in July
* Data offsets inflation fears from labor costs increase on
* Yield curve steepens as Fed seen having more time before
By Karen Brettell
NEW YORK, Aug 1 U.S. Treasuries prices gained on
Friday after jobs data eased concerns about rising wage
inflation, and reduced expectations that the Federal Reserve may
act sooner than some had anticipated to increase interest rates.
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.
The debt weakened 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
Benchmark 10-year notes were last up 15/32 in
price to yield 2.51 percent, down from 2.58 percent before the
jobs data was released.
Short- and intermediate-dated debt, which is the most
sensitive to interest rate expectations, outperformed on Friday
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 Fed 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.
Rick Rieder, chief investment officer of fundamental fixed
income at BlackRock, sees the curve as likely to resume
flattening, however, as liquidity dries up for August and as
investors continue to grapple with Fed policy.
"In August, liquidity is not as high. Rates will drift
higher. The front-end of the curve will lead the market higher,"
Longer-dated Treasuries were among the few bond markets that
posted positive returns in July, as investors searched for lower
risk assets and extended duration to reach higher yields.
Treasuries that mature in 20 years or longer produced a
total return of 0.66 percent, the best U.S. bond category in
July and so far in 2014, according to data by Barclays.
(Additional reporting by Richard Leong, Editing by Nick
Zieminski and Meredith Mazzilli)