November 2, 2018 / 7:18 PM / 10 months ago

TREASURIES-Yields rise as U.S. job growth suggests a Fed rate hike

(Updates yields)

By Kate Duguid

NEW YORK, Nov 2 (Reuters) - U.S. Treasury yields rose on Friday after a strong payrolls report 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, but recorded the largest annual gain in 9-1/2 years. The unemployment rate held steady at a 49-year low of 3.7 percent as 711,000 people entered the labor force.

“The economic data continue to be strong enough to keep the Fed in tightening mode. We look for a December rate hike and about two more next year,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research.

The benchmark 10-year government note yield was last at 3.212 percent, up about 6 basis points from the jobs announcement.

Yields at the short end of the curve, which reflect traders’ expectations of interest-rate hikes, rose at a slower pace. The yield on the two-year note was up 4.5 basis points, last at 2.912 percent. That steepened the yield curve, measured as the spread between two- and 10-year note yields, to 30 basis points from 27.9 at the open.

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 U.S. central bank 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 72.1 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 earlier had driven down yields. A senior Trump administration official, speaking on CNBC on Friday, dismissed as untrue a media report that President Donald Trump was readying a possible trade deal with China.

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. (Reporting by Kate Duguid; Editing by Andrea Ricciand Leslie Adler)

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