(Adds detail on U.S.-China trade, updates yields)
By Kate Duguid
NEW YORK, Nov 2 (Reuters) - Modest wage gains constrained U.S. Treasury yields on Friday despite an otherwise strong payrolls report that showed job growth rebounded sharply in October, pointing to further labor market tightening that could encourage the Federal Reserve to raise interest rates again in December.
The Labor Department’s closely watched monthly employment report showed that wage growth slowed in October, despite recording the largest annual gain in 9-1/2 years.
Average hourly earnings rose five cents, or 0.2 percent, in line with expectations after advancing 0.3 percent in September. That boosted the annual increase in wages to 3.1 percent, the biggest gain since April 2009, from 2.8 percent in September.
“These were excellent job growth numbers and excellent revisions. Inside the wage growth figures, you now have this annualized growth rate above 3 percent. So, we’ve got almost exactly what we expected without a blowout in wage growth,” said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.
The benchmark 10-year government note yield was last at 3.176 percent, up just over two basis points from the announcement. Yields at the short end of the curve, which reflect traders’ expectations of interest-rate hikes, rose at a similar pace, with the yield on the two-year note up 2.4 basis points, last at 2.891 percent.
The Fed is not expected to raise rates at its policy meeting next week, but analysts believe October’s strong labor market data could spur the Fed to signal an increase in December. The Fed raised borrowing costs in September for the third time this year.
Traders’ expectations that the Fed will raise rates in December jumped to 75 percent from 68.8 percent on Thursday, according to CME Group’s FedWatch tool.
Worries that the United States and China would not reach a trade agreement sank yields prior to the release of the nonfarm payrolls report. A senior Trump administration official on Friday dismissed as untrue a media report that U.S. President Donald Trump was readying a possible trade deal with China, a CNBC reporter said in a post on Twitter.
Treasuries act as a safe-haven investment during moments of political instability, even when the actors involved include the White House. Investors also believe that although trade disputes will hurt U.S. growth, the country’s trading partners will be hurt more.
“The bigger factor (driving yields) is the trade news. The employment news is having a slightly lesser impact so far. Trump has leaked idea about a trade deal with China, but that could change on a whim,” said John Canavan, market strategist at Stone & McCarthy Research Associates. (Reporting by Kate Duguid; Editing by Susan Thomas and Nick Zieminski)