The U.S. benchmark 10-year Treasury yield soared to a two-year high on Friday, further denting investor interest in tech stocks, as a mixed U.S. nonfarm payrolls report that showed fewer-than-expected new jobs created in December was viewed as good enough to keep the Federal Reserve on track to raise interest rates at its March meeting.
The major U.S. indexes all closed lower, led by a nearly 1% drop in the Nasdaq, although the TSX ended with a very slight gain thanks to gains in the energy and financials sectors.
The U.S. 10-year yield rose to 1.801%, the highest since January 2020. Canada’s 10-year government bond was fetching 1.745%, just below levels of November of last year and not far from its highest point since 2019.
U.S. 10-year yields have gained about 25 basis points this week, the biggest weekly rise since September 2019.
Friday’s Labor Department data showed the U.S. jobs market was at or near maximum employment even though employment rose far less than expected in December amid worker shortages.
On Wednesday, minutes of the Fed’s Dec. 14-15 policy meeting published showed officials at the U.S. central bank viewed the labor market as “very tight,” and signaled the Fed may have to raise rates sooner than expected to curb inflation. It also raised the possibility that the Fed may not only taper bond purchases, but start reducing the size of its balance sheet. That took some traders by surprise.
“The investor takeaway is that the labour market continues to be tight despite the headline miss,” said Michael Arone, chief investment strategist at State Street Global Advisors in Boston. “Investors are concerned the Fed will be more aggressive than expected.”
Fed funds futures imply a roughly 90% chance of a 25-basis point tightening by the U.S. central bank by March, and more than three rate hikes by the end of the year..
“As we tear apart what happened to the 10-year yield this week, there is obviously the possibility that Fed raises interest rates sooner,” said Jim Vogel, senior rates strategist, at FHN Financial in Memphis, Tennessee.
“But we also saw a 10 basis-point impact from increased bond supply from corporates, governments, quasi-governments around the world and also the Fed pulling back some of its support. Back in December, people did not actually think the Fed may use the balance sheet as a more aggressive monetary policy tool this year.”
The Toronto Stock Exchange’s S&P/TSX composite index ended up 12.25 points, or 0.06%, at 21,084.45 on Friday. For the week, it was down 0.65%.
Domestic data showed the Canadian economy adding twice as many jobs as expected in December, supporting expectations for the Bank of Canada to begin hiking rates in the coming months.
The Toronto market’s technology group fell for a fifth straight session, down 1.4%, but that was offset by gains for the heavily weighted financials group and energy stocks. Financials ended 0.4% higher, while energy climbed 0.9% as oil held on to much of this week’s rally.
U.S. crude prices settled 0.7% lower at $78.90 a barrel on Friday but were up nearly 5% for the week as the market weighed unrest in Kazakhstan and outages in Libya.
Apparel manufacturer Canada Goose Holdings Inc was among the biggest decliners in Canada, falling 6.3% after UBS slashed its target price on the stock.
On Wall Street, consumer discretionary and and technology sectors led the way lower on the S&P 500 on Friday, while the S&P 500 financials sector and banking index extended recent gains. Banks have been helped by rising U.S. Treasury yields.
According to preliminary data, the S&P 500 lost 19.00 points, or 0.42%, to end at 4,676.51 points, while the Nasdaq Composite lost 146.29 points, or 0.98%, to 14,934.57. The Dow Jones Industrial Average fell 8.27 points, or 0.02%, to 36,228.20.
Rising cases on the Omicron variant of the coronavirus also caused investor jitters this week.
Investors have been rotating out technology-heavy growth shares and into more value-oriented shares, which they think may do better in a high interest-rate environment.
The S&P 500 energy sector gained sharply during the week.
“Meme stock” GameStop Corp jumped after the video game retailer said it is launching a division to develop a marketplace for nonfungible tokens and establish cryptocurrency partnerships.
Reuters, Globe staff
Be smart with your money. Get the latest investing insights delivered right to your inbox three times a week, with the Globe Investor newsletter. Sign up today.