Bond Report: Treasury yields hold ground ahead of U.S. May jobs report

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Treasury yields were little changed Friday as investors awaited official May jobs data from the U.S. Labor Department.

What yields are doing

The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.921%

was at 2.914%, unchanged from 3 p.m. Eastern on Thursday.

The 2-year Treasury note yield
TMUBMUSD02Y,
2.646%

was flat at 2.638%.

The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.090%

was 3.08%, up slightly from 3.075% late Thursday.

What’s driving the market

Treasury yields have risen this week as investors penciled in expectations for the Federal Reserve to maintain a fast pace of interest-rate hikes this year as it attempts to rein in inflation.

Fed Vice Chair Lael Brainard and Cleveland Fed President Loretta Mester on Thursday both sounded a hawkish note. Brainard told CNBC she didn’t think the Fed should pause rate increases in September, while Mester, in a speech, said the Fed must show “fortitude” in its battle to get inflation back under control and that could mean the fast pace of rate hikes could potentially continue in September.

Earlier this week, Atlanta Fed President Raphael Bostic told MarketWatch a pause in September might make sense to give the Fed time to assess how the economy was reacting to the series of rate hikes this year.

The jobs market remains tight. The number of new jobs the U.S. created in May is expected to slow to a 13-month low of 328,000, according to a poll of economists by The Wall Street Journal. By comparison, the economy has added at least 400,000 jobs a month in the past year, and its gained an average of 518,000 a month in 2022.

Economists expect the unemployment rate to drop to 3.5% from 3.6% and match the prepandemic low in 2020. Before that, the last time the jobless rate was as low was in 1968.

Investors are watching for signs that hiring is starting to slow. The Federal Reserve’s Beige Book report earlier this week noted some large companies have started to put hiring freezes in place. ADP’s May private-sector payrolls report on Thursday showed the lowest number of new jobs since May, though economists note the ADP data has been a poor guide to the official figures.

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Wage growth will be closely watched given inflation concerns. Economists expect another 0.4% increase in wages in May, though there are signs that pay gains are starting to wane.

The jobs report is due at 8:30 a.m. ET. Other U.S. economic data on tap for Friday include the final reading of the S&P Global May services purchasing managers index for the U.S. at 9:45 a.m. and the Institute for Supply Management’s May services index at 10 a.m.

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What analysts are saying

“Hourly earnings will probably remain solid and could be defining for the market reaction,” said analysts at KBC Bank in Brussels, in a note,

A stronger-than-expected manufacturing index reading from the Institute for Supply Management earlier this week ended a downward correction in yields, they said, adding that they wondered if the ISM services gauge would also surprise to the upside.

“This week’s batch of strong U.S. [economic] data in any case convinced investors for the time being that the U.S. economy is strong enough to withstand Fed tightening,” they wrote. “We see room for U.S. bond yields to extend gains following decent-to-strong data.”

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