U.S. Treasury yields rose on Friday and a closely watched part of the yield curve reinverted as a strong jobs report for March supported the view that the Federal Reserve will need to aggressively hike rates to stem soaring inflation.
The Labor Department’s closely monitored employment report’s survey of establishments showed that nonfarm payrolls increased by 431,000 jobs last month. The unemployment rate dropped to 3.6%, the lowest since February 2020, from 3.8% in February.
With workers still scarce, average hourly earnings increased 0.4% after edging up 0.1% in February. That lifted the annual increase to 5.6% from 5.2% in February.
“The market is reading it as things are quite tight and the Fed has to tighten rather soon and rather quickly,” said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
Two-year yields rose as high as 2.456%, from around 2.39% before the data. Benchmark 10-year yields rose to 2.456%, from around 2.40%.
The closely watched yield curve between two-year and 10-year notes inverted for the third time this week, following two brief dips into negative territory on Tuesday and late on Thursday.
That part of the yield curve reached minus 2.77 basis points, before rebounding to trade near flat. An inversion is viewed as a reliable signal that a recession may follow in one to two years.
The curve has been flattening as growth concerns and demand for duration holds down longer-dated yields relative to shorter-dated ones, which have been surging on expectations that the Federal Reserve will need to aggressively hike rates to stem the fastest inflation in 40 years.
Two-year yields jumped by 160 basis points during the first quarter, the largest quarterly increase since September 1981. The 10-year yields rose by 83 basis points, the biggest basis point jump since December 2016.
Fed funds futures traders are pricing in a 73% chance that the Fed will hike rates by 50 basis points at its May meeting, and expects the Fed’s benchmark rate to rise to 1.17% in June, from 0.33% now.
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