* U.S. August non-farm payrolls increase 173,000
* July payrolls upwardly revised to 245,000
* Data overall supports perception of September Fed rate hike (Updates prices, adds fed funds futures contracts data, analyst comment)
By Sam Forgione
NEW YORK, Sept 4 (Reuters) - U.S. medium- and long-dated Treasuries prices rose on Friday, while prices for short-dated notes fell slightly, after U.S. monthly employment data bolstered the case for the Federal Reserve to hike interest rates later this month.
Nonfarm payrolls increased 173,000 last month, a slowdown from July’s upwardly revised gain of 245,000 and the smallest rise in five months, the Labor Department said. Economists had expected a gain of 220,000 jobs in August.
Payrolls data for both July and June, however, were revised to show 44,000 more jobs created than previously reported. In addition, average hourly earnings increased 8 cents, the biggest rise since January, and the workweek rose to 34.6 hours.
Analysts said the average hourly earnings and workweek increases supported the view that the Fed would hike rates at its Sept. 16-17 policy meeting.
“They probably raise rates just because they’ve been wanting to get off the zero bound, but I do think it’s one of the closer calls,” said Marc Bushallow, director of fixed income at Manning & Napier in Rochester, New York.
U.S. two-year notes were last down 1/32 in price to yield 0.72 percent, from a yield of 0.7 percent late on Thursday, while 30-year prices were last up 1-2/32 to yield 2.89 percent after yielding 2.95 percent late on Thursday.
Analysts said the “curve flattening” trade showed selling pressure on short-dated notes since they are most vulnerable to Fed rate hikes, while prices for long-dated notes rose since the lower inflation expected to come with rate hikes is beneficial to those bonds. Lower inflation preserves the value of long-dated bonds’ interest payouts.
While analysts said the Treasury market expressed the view that a September rate hike was more likely, the September fed funds futures contract was unchanged on Friday, while the December contract was down 1.5 basis points. According to CME Group’s FedWatch site, that suggests less than a 20 percent probability of a September rate hike and a bit more than 50 percent for a hike in December.
“The reaction in the Treasury market seems to be exaggerated compared to some of the money market instruments that track fed funds probabilities,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC in Philadelphia.
Benchmark 10-year Treasury notes were last up 10/32 in price to yield 2.13 percent, from a yield of 2.17 percent late on Thursday. (Reporting by Sam Forgione; Editing by Paul Simao)