(Adds analyst quotes, updates rates, headline)
By Kate Duguid
NEW YORK, Jan 4 (Reuters) - Treasury yields rose on Friday after the U.S. employment report for December came in more robust than expected, and on the back of U.S. equities, which hit session highs as Federal Reserve Chair Jerome Powell struck a dovish tone in a roundtable interview.
Powell’s remark that the Fed would adjust its rate-hiking policy if economic conditions demanded it sent investors into riskier assets, benefiting stocks and lowering Treasury prices, and reversing some of the effects of this week’s financial market fluctuations.
“Powell pushed back a bit on the narrative of ‘no rate hikes in 2019’, which seems to have pervaded the bond markets over the last four weeks,” said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott LLC.
“At the same time, he expressed a sensitivity to weaker financial market conditions. The net impact is likely to be a bit more selling pressure in the interest rate sector.”
U.S. equities prices have swung wildly in the first week of the year, retreating in fits and starts on evidence of a global economic slowdown. China this week posted data showing factory activity contracted in December for the first time in 19 months, and there is evidence of weak manufacturing across much of Europe and Asia. Slowing iPhone sales in China also led Apple Inc to issue a revenue warning ahead of its next quarterly earnings report.
When asked by the moderator of the American Economic Association conference panel on which Powell appeared alongside former chairs Janet Yellen and Ben Bernanke, he stated his commitment to the political independence of the central bank, also a boon for markets.
Treasury yields had already been rising after the stronger-than-expected employment report showed employers hired the most workers in 10 months in December while boosting wages. The Labor Department reported that nonfarm payrolls rose by 312,000 jobs versus an expected 177,000.
Rates across maturities were up, with the biggest gains in the middle of the yield curve. The five-year note yield was up 11 basis points at 2.48 percent, just below the two-year yield. The spread between two- and five-year notes first inverted on Dec. 3 and has been hovering around zero since then.
The spread between two- and 10-year yields is the conventional measure of the yield curve, the inversion of which is a strong indicator of recession. Spreads along the curve, like that between two- and five-year yields, however, tend to invert before the two- and 10-year spread.
The benchmark 10-year government yield was last at 2.65 percent, up 10 basis points from Thursday’s close. (Reporting by Kate Duguid; Editing by David Gregorio and Grant McCool)