July 8, 2019 / 3:03 PM / 2 months ago

TREASURIES-Yield curve flattens as strong jobs data trims bets on 50-point rate cut

NEW YORK, July 8 (Reuters) - The U.S. Treasury yield curve flattened on Monday morning after stronger-than-expected employment data on Friday led traders to significantly reduce bets on an aggressive 50 basis point interest-rate cut in July.

U.S. job growth rebounded strongly in June, with government payrolls surging, according to the Labor Department’s employment report on July 5. Nonfarm payrolls increased by 224,000 jobs last month as government employment rose by the most in 10 months. The economy created only 72,000 jobs in May. Economists polled by Reuters had forecast payrolls rising 160,000 in June.

That cast doubt on a 50 basis point interest-rate cut by the Federal Reserve at its policy meeting later this month. A week ago, the market forecast an 80.1% chance of a 25 basis point cut, and a 19.9% chance of a 50 basis point cut, according to CME Group’s FedWatch tool. In mid-morning trade, the chances were 93% and 7%, respectively.

On Wednesday this week, Fed Chair Jerome Powell will give his semiannual monetary policy report to the House Financial Services Committee in Washington. “Powell will either try to push back on a cut in July or confirm one, and I think there is a 25% chance he tries to push back, given the recent data,” wrote Thomas Simons, senior money market economist at Jefferies.

Treasury yields on Monday were lower across maturities, with the largest moves at the long end of the yield curve. The spread between two- and 10-year yields, the most widely used measure of the yield curve, fell to 15.8 basis points from its close Friday at 16.9.

The yield on the benchmark 10-year note was last down 2.4 basis points at 2.020%, with the 30-year yield 3.3 basis points lower at 2.515%. The 10-year yield was just off its open a week prior, after rising on Friday following the employment report.

“The market’s response to the strong employment report was exaggerated by the semi-holiday trading conditions and we’ll be watching this morning’s session for either confirmation or a challenge of the repricing,” wrote Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

Later in the week, the U.S. will report consumer price inflation numbers, which are expected to be weak as a result of lower gasoline prices. “It may provide the final piece of confirmation for a 25 basis point rate cut in July,” said Simons. (Reporting by Kate Duguid; Editing by Steve Orlofsky)

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