October 3, 2018 / 3:49 PM / 2 months ago

TREASURIES-Four-year high on 30-year yield as case for Dec rate hike rises

 (Recasts headline and lead, adds 30-year high, updates table)
    By Kate Duguid
    NEW YORK, Oct 3 (Reuters) - U.S. Treasury yields rose on
Wednesday, with the 30-year yield hitting a four-year high,
after U.S. private payrolls recorded their biggest increase in
seven months in September, bolstering the case for the Federal
Reserve to raise rates in December.
    The 30-year yield rose 6.6 basis points to 3.283
percent, its highest since September 2014. Benchmark 10-year
government yields, which reflect the market's view
on the overall health of the economy, were also up 6.6 basis
points to 3.127 percent as sustained labor market strength
should continue to underpin economic growth.   
    Private payrolls rose by 230,000 jobs in September, the
largest gain since February, the ADP National Employment Report
showed, after an upwardly revised 168,000 increase in August.
The ADP report was published ahead of the government's more
comprehensive employment report for September due on Friday.

    "Since today's data came in well above market expectations,
this release is likely to inspire other forecasters to revise
their forecasts higher," said Ward McCarthy, money market
economist at Jefferies. 
    He noted, however, that due to an erratic correlation
between the ADP and the government's non-farm payrolls releases,
the firm tends not to revise its payrolls forecast based on ADP
data.
    Despite the ADP report's poor record predicting the
private-payrolls component of the government's employment
report, last month's jump underscored robust labor market
conditions that are likely to keep the Federal Reserve on track
to raise interest rates again in December.  
    Stellar data on the U.S. non-manufacturing sector from the
Institute for Supply Management further supported the ADP data
from earlier in the morning, and pushed yields across maturities
higher.
    In spite of that, labor strength wage growth has continued
to be muted. "There was quite the clamoring after the (August)
wage numbers came in much firmer, but on a real basis, they're
flat, and a lot of it is just catch up and lag... It was
somewhat of an overreaction," said Greg Peters, senior portfolio
manager at PGIM Fixed Income. 
    Wage growth is a key component in rising inflation, which
the Fed manages through interest rate policy. Labor market
strength, without wage growth, may force the central bank to
reconsider its rate-hiking strategy. 
    Yields also rose on Wednesday morning after the selloff in
Italian bonds, which began late Monday, abated. Italy's populist
government will cut its budget deficit targets from 2020,
Economy Minister Giovanni Tria said on Wednesday, relieving some
pressure on the country's financial markets after investors
boosted the benchmark Italian government bond to a
4-1/2 year high as they sought safety in other markets.

    
    October 3 Wednesday 11:38AM New York / 1538 GMT
                               Price                  
 US T BONDS DEC8               139-2/32     -1-14/32  
 10YR TNotes DEC8              118-92/256   -0-116/2  
                                            56        
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.18         2.2225    0.000
 Six-month bills               2.355        2.4165    0.013
 Two-year note                 99-206/256   2.8516    0.037
 Three-year note               99-128/256   2.928     0.048
 Five-year note                99-108/256   3.0006    0.058
 Seven-year note               99-136/256   3.075     0.063
 10-year note                  97-228/256   3.1249    0.069
 30-year bond                  94-152/256   3.2854    0.078
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        16.75        -0.25    
 spread                                               
 U.S. 3-year dollar swap        15.75         0.00    
 spread                                               
 U.S. 5-year dollar swap        11.25        -0.25    
 spread                                               
 U.S. 10-year dollar swap        4.50        -0.75    
 spread                                               
 U.S. 30-year dollar swap       -9.25        -1.00    
 spread                                               
 
 (Reporting by Kate Duguid; 
Editing by Andrea Ricci and Alistair Bell)
  
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