January 4, 2018 / 9:19 PM / a year ago

TREASURIES-U.S. bond yields climb but show caution ahead of payrolls data

 (Updates market action, adds quote)
    * Yields hit 9-year peak on private hiring data
    * U.S. private jobs growth strongest in 9 months in Dec -ADP
    * Traders raise bets on Fed interest rate hike in March
    * U.S. yield curve moves near flattest level in a decade

    By Kate Duguid
    NEW YORK, Jan 4 (Reuters) - Yields on U.S. government bonds
rose modestly on Thursday, a day before the December payrolls
report, which is expected to show further improvement in the
jobs market, though some traders worry that wage growth may fall
short of expectations. 
    Two-year Treasury yields reached a nine-year peak earlier on
Thursday on stronger-than-expected data on private employment in
December from ADP, which stoked bets the Federal Reserve may
raise interest rates at its March policy meeting.
    The selling in Treasuries slowed on renewed concerns over
whether wage growth is accelerating and propelling inflation
closer to the Fed's target of 2 percent. 
    The U.S. Labor Department will report jobs data for December
at 8:30 a.m. (1230 GMT) Friday. Nonfarm payrolls are forecast to
increase by 190,000 after surging by 228,000 in November, with
the unemployment rate steady at 4.1 percent, according to
Thomson Reuters.  
    “There’s probably a little bit of caution going into the
employment figure tomorrow,” said Subadra Rajappa, head of U.S.
rates strategy at Societe Generale, in New York.
    “The focus will be on average hourly earnings which is, for
the most part, what has driven expectations of inflation and
wage growth,” Rajappa said. The market will be watching “whether
there are nascent signs of a pickup in wages.” 
    That said, the front end of the curve remained under
pressure after the robust December ADP data and hawkish views
expressed in the Fed’s latest policy minutes released on
Wednesday raised the chances of an interest-rate hike in March. 
    U.S. companies added 250,000 workers in December, the
biggest monthly increase since March, the ADP National
Employment Report showed earlier on Thursday.
    The data boosted bets in the futures market of a possible
rate hike at the Fed's March 20-21 policy meeting.
    Federal funds futures implied traders saw a 73
percent chance of a quarter-point rate increase to 1.50
percent-1.75 percent in March, up from 68 percent late on
Wednesday, according to CME Group's FedWatch.  
    At 3:24 p.m., two-year yields were at 1.960
percent after hitting 1.976 percent earlier in the day, the
highest level since October 2008. The five-year yield
was 2.270 percent, down from 2.292 percent, its highest level
since April 2011. 
    Perception of a possible March rate increase weighed the
yield curve to near its flattest level in a decade as
shorter-dated yields rose more than longer-dated ones.
    The spread between five-year and 30-year Treasury yields
 narrowed to 51.6 basis points, about 1 basis
point short of the flattest level in a decade set earlier this
    Benchmark 10-year Treasury yields were 2.454
percent, down from a high of 2.485 percent on Thursday morning.
    January 4 Thursday 3:27PM New York / 2027 GMT
 US T BONDS MAR8               152-9/32     -0-1/32   
 10YR TNotes MAR8              123-172/256  -0-28/25  
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             1.38         1.404     0.000
 Six-month bills               1.56         1.5942    0.002
 Two-year note                 99-214/256   1.9596    0.025
 Three-year note               99-134/256   2.0426    0.028
 Five-year note                99-82/256    2.2699    0.024
 Seven-year note               99-36/256    2.3842    0.017
 10-year note                  98-56/256    2.4543    0.009
 30-year bond                  99-64/256    2.7871    0.004
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        18.25         0.50    
 U.S. 3-year dollar swap        19.25         0.75    
 U.S. 5-year dollar swap         4.25         0.50    
 U.S. 10-year dollar swap       -1.00         0.75    
 U.S. 30-year dollar swap      -20.50         0.00    

 (Reporting by Kate Duguid; Additional reporting by Richard
Leong; Editing by Leslie Adler)
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