February 2, 2018 / 9:27 PM / 17 days ago

TREASURIES-Robust U.S. jobs data intensifies bond market rout on rate worries

    * U.S. 10-year yield posts longest weekly losing streak
    * Year-over-year U.S. wage growth strongest since 2009
    * Fed's Williams calls for rate hikes as economy improves
    * U.S. 2-year yield dips on safe-haven bids as Wall St sags

 (Updates market action, adds quotes)
    By Richard Leong
    NEW YORK, Feb 2 (Reuters) - A strong U.S. payrolls report on
Friday raised concerns the Federal Reserve might hasten to
increase interest rates to stem inflation, compounding a bond
market rout that pushed the yield on the benchmark 10-year
Treasury note to a four-year high.
    Global bond yields have been rising on expectations of
improving global growth and speculation of reduced stimulus from
overseas central banks. The spike in yields rattled stock
markets this week on worries about the impact of rising
borrowing costs on consumers and companies.
    "Right now, everyone is a bit nervous," said Gemma
Wright-Casparius, senior portfolio manager at Vanguard in
Malvern, Pennsylvania. "We are seeing a global sell-off in
rates."
    While traders appear more upbeat on economic prospects
outside the United States, domestic business activities have
remained solid with signs inflation is edging closer to the
Fed's 2 percent target. 
    Some Fed officials have been reluctant to raise rates
further without evidence of an acceleration in inflation, while
others felt conditions are ripe for the Fed to further tighten
policy.
    The Labor Department said on Friday that employers hired an
additional 200,000 workers last month, more than the 160,000
they added in December. More importantly, average hourly
earnings grew 0.3 percent, bringing the year-over-year increase
to 2.9 percent, the biggest annual rise since June 2009.
    The encouraging wage figure lifted a gauge of investor
expectations on inflation to its highest level in almost 3-1/2
years.
    
    INFLATION EXPECTATIONS
    The yield premium on regular 10-year Treasury notes over
10-year Treasury inflation protected securities grew to 2.14
percentage points, the most since September 2014, according to
Reuters and Tradeweb data.
    San Francisco Fed President John Williams said on Friday
that more rate increases are warranted as the economy has showed
more improvement, but he did not favor increasing rates more
than the three hikes the Fed has forecast for 2018.
    Interest rates futures implied growing bets the U.S. central
bank will raise rates three times this year.
    The yield on the benchmark 10-year Treasury
reached a four-year peak at 2.852 percent. It was last at 2.841
percent, up 6.8 basis points on the day, marking five
consecutive weeks of increases for the longest such stretch
since late 2016.
    The 2-year yield touched a more than nine-year
high at 2.186 percent before ending lower to 2.145 percent on a
bout of safe-haven buying. The S&P 500 and the Dow both scored
their worst weeks in two years.
    The yield curve further reversed its earlier flattening move
tied to expectations that inflation would stay muted. The yield
spread between 2-year and 10-year Treasuries widened to 69 basis
points, the most since mid-November after hitting a decade low
nearly a month ago.
    "Yields can go higher, but I don't think they are going to
stay there," said Rich Piccirillo, senior portfolio manager at
PGIM Fixed Income in Newark, New Jersey.
    Friday, Feb. 2 at 1602 EST (2102 GMT):
                               Price                   
 US T BONDS MAR8               145-4/32     -1-14/32   
 10YR TNotes MAR8              120-220/256  -0-92/256  
                               Price        Current    Net
                                            Yield      Change
                                            (pct)      (bps)
 Three-month bills             1.46         1.4855     -0.003
 Six-month bills               1.605        1.6403     -0.008
 Two-year note                 99-184/256   2.1453     -0.016
 Three-year note               99-24/256    2.3202     0.003
 Five-year note                99-4/256     2.5867     0.028
 Seven-year note               98-88/256    2.7623     0.052
 10-year note                  95-4/256     2.8373     0.064
 30-year bond                  93-156/256   3.0793     0.073
                                                       
   DOLLAR SWAP SPREADS                                 
                               Last (bps)   Net        
                                            Change     
                                            (bps)      
 U.S. 2-year dollar swap        22.25         2.50     
 spread                                                
 U.S. 3-year dollar swap        20.25         1.50     
 spread                                                
 U.S. 5-year dollar swap         9.25         0.75     
 spread                                                
 U.S. 10-year dollar swap        3.00        -0.50     
 spread                                                
 U.S. 30-year dollar swap      -14.00        -1.50     
 spread                                                
 

    
 (Reporting by Richard Leong; Editing by Steve Orlofsky and
Leslie Adler)
  
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