January 10, 2020 / 7:13 PM / 9 days ago

TREASURIES-Modest jobs growth, low inflation risk drive yields down

(Updates yields)

By Kate Duguid

NEW YORK, Jan 10 (Reuters) - U.S. Treasury yields were lower on Friday after the Labor Department’s nonfarm payrolls report showed job growth slowed more than expected in December and wages stagnated, limiting inflation risk.

Trade was choppy following the report. Yields first fell, then recouped, then fell again to end the day lower. The benchamark 10-year yield was last down 3.3 basis points to 1.825%. But with the pace of hiring in December strong enough and the unemployment rate low enough to maintain the longest U.S. economic expansion in history, the dip in yields was relatively modest.

“The bottom line: It came in a little under consensus but still, there are more jobs than required to hold the unemployment rate constant over the long term,” said Doug Duncan, chief economist at Fannie Mae.

The two-year yield was half a basis point lower at 1.570%, reflecting market expectations that Friday’s report will not change the Federal Reserve’s plan to keep interest rates steady for the near future.

“We don’t think this will change the Fed’s mind on anything,” said Duncan. “All of this suggests that the economy is OK, and it’s very consistent with our forecast of somewhere between 2% and 2.25% growth.”

The Labor Department reported that nonfarm payrolls increased by 145,000 jobs last month, with manufacturing shedding jobs after being boosted in November by the end of a General Motors strike. The jobless rate held near a 50-year low of 3.5% and a broader measure of unemployment dropped to a record low 6.7%, though wage gains ebbed.

Wage stagnation also contributed to the drop in yields. Average hourly earnings rose by 3 cents, or 0.1%, last month, after increasing 0.3% in November. That lowered the annual increase in wages to 2.9% in December from 3.1% in November.

Lower wages limit inflationary pressure, expectations of which move in step with Treasury yields.

“For the bond market this will be viewed as a positive number, especially when it comes to wage inflation,” said Kevin Giddis, chief fixed-income strategist at Raymond James.

“The subtle drop in the number of hours worked,” he said, “and the lower-than-expected average hourly earnings number is good for fixed income. While today’s data may not result in a big move down in rates, it certainly doesn’t support a big move higher either.”

Reporting by Kate Duguid; Editing by Nick Zieminski and Leslie Adler

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