Bonds News

TREASURIES-Modest jobs growth, low inflation risk drive yields down

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NEW YORK, Jan 10 (Reuters) - U.S. Treasury yields were lower on Friday after the Labor Department’s nonfarm payrolls report showed job growth slowed more than expected in December and wages stagnated, limiting inflation risk.

In choppy trade following the report, yields first fell, then recouped, then fell once more. The benchmark 10-year yield was last down 1.4 basis points on the day to 1.844%. Ultimately, the dip in yields was relatively modest as the pace of hiring remained strong enough, and unemployment rate low enough, to maintain the longest U.S. economic expansion in history.

“The bottom line: it came in a little under consensus but still, there are more jobs than required to hold the unemployment rate constant over the long term,” said Doug Duncan, chief economist at Fannie Mae.

The two-year yield was flat at 1.576%, reflecting market expectations that Friday’s report will not change the Federal Reserve’s plan to keep interest rates where they are for the near future.

“We don’t think this will change the Fed’s mind on anything,” said Duncan.

“All of this suggests that the economy is ok and it’s very consistent with our forecast of somewhere between 2% and 2.25% growth.”

Friday’s report showed nonfarm payrolls increased by 145,000 jobs last month, with manufacturing shedding jobs after being boosted in November by the end of a General Motors strike. The jobless rate held near a 50-year low of 3.5% and a broader measure of unemployment dropped to a record low 6.7% last month, though wage gains ebbed.

The drop in yields is also attributable to the reported wage stagnation. Average hourly earnings rose three cents, or 0.1% last month, after increasing 0.3% in November. That lowered the annual increase in wages to 2.9% in December from 3.1% in November.

Lower wages limit inflationary pressure, expectations of which move in step with Treasury yields.

“For the bond market this will be viewed as a positive number, especially when it comes to wage inflation,” said Kevin Giddis, chief fixed income strategist at Raymond James.

“The subtle drop in the number of hours worked,” he said, “and the lower than expected average hourly earnings number is good for fixed income. While today’s data may not result in a big move down in rates, it certainly doesn’t support a big move higher either.”

Reporting by Kate Duguid; Editing by Hugh Lawson and Nick Zieminski