October 3, 2018 / 4:31 PM / in 2 months

TREASURIES-Yields hit decade highs as case for Dec rate hike mounts

 (Recasts headline, lead, adds record yields)
    By Kate Duguid
    NEW YORK, Oct 3 (Reuters) - U.S. Treasury yields rose on
Wednesday, with maturities at the short end of the curve hitting
decade highs, after U.S. private payrolls in September recorded
their biggest increase in seven months, bolstering the case for
the Federal Reserve to raise rates in December.
    The two-year note yield, which reflects market 
expectations of interest rate hikes, rose to 2.852 percent, its
highest since June 2008. Yields on the three- and five-year
notes rose to their highest since December
2007 and October 2008 respectively.   
    The 30-year yield rose more than 7 basis points
to 3.289 percent, its highest since September 2014. Benchmark
10-year government yields, which reflect the
market's view on the overall health of the economy, were up 6.8
basis points to 3.129 percent 
    Private payrolls rose by 230,000 jobs in September, the
largest gain since February, the ADP National Employment Report
showed, after an upwardly revised 168,000 increase in August.
The government's more comprehensive employment report for
September is due on Friday.
    "Since today's data came in well above market expectations,
this release is likely to inspire other forecasters to revise
their forecasts higher," said Ward McCarthy, money market
economist at Jefferies. 
    He said the ADP report does not always help predict
government non-farm payrolls releases. Still, a robust labor
market should keep the Federal Reserve on track to raise
interest rates in December.  
    Strong U.S. non-manufacturing data from the Institute for
Supply Management further supported the ADP data, pushing yields
higher.
    While labor markets are strong, wage growth has been muted.
    "There was quite the clamoring after the (August) wage
numbers came in much firmer, but on a real basis, they're flat,
and a lot of it is just catch up and lag... It was somewhat of
an overreaction," said Greg Peters, senior portfolio manager at
PGIM Fixed Income. 
    Labor market strength without wage growth may not result in
much inflation pressure, which in turn could prompt the Fed to
reconsider its rate-hiking strategy. 
    
      October 3 Wednesday 12:11PM New York / 1611 GMT
                               Price                  
 US T BONDS DEC8               139-6/32     -1-10/32  
 10YR TNotes DEC8              118-88/256   -0-120/2  
                                            56        
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.18         2.2225    0.000
 Six-month bills               2.3525       2.4139    0.011
 Two-year note                 99-206/256   2.8516    0.037
 Three-year note               99-128/256   2.928     0.048
 Five-year note                99-106/256   3.0023    0.059
 Seven-year note               99-132/256   3.0775    0.066
 10-year note                  97-228/256   3.1249    0.069
 30-year bond                  94-180/256   3.2794    0.072
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        17.00         0.00    
 spread                                               
 U.S. 3-year dollar swap        15.75         0.00    
 spread                                               
 U.S. 5-year dollar swap        11.00        -0.50    
 spread                                               
 U.S. 10-year dollar swap        4.25        -1.00    
 spread                                               
 U.S. 30-year dollar swap       -9.25        -1.00    
 spread                                               
 
 (Reporting by Kate Duguid; 
Editing by Andrea Ricci, Alistair Bell and David Gregorio)
  
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