By Karen Brettell
NEW YORK, Feb 8 (Reuters) - U.S. Treasury yields held
near one-month highs on Wednesday as investors adjusted for the
likelihood that the Federal Reserve will hike interest rates
further than previously expected, following a blockbuster jobs
report for January.
The jobs report on Friday showed why the fight against
inflation will "take quite a bit of time," Fed Chair Jerome
Powell said on Tuesday, acknowledging that interest rates may
need to move higher than expected if that sort of economic
strength threatens the U.S. central bank's progress in lowering
inflation.
Traders had been pricing for the Fed's benchmark rate to
hold below 5% and for the central bank to begin cutting rates
this year, even as Fed officials said they would need to keep
rates in restrictive territory for a period of time in order to
bring down price pressures.
But the gain of 517,000 jobs in January, which was almost
three times the forecast in a Reuters poll of economists, has
led investors to reprice for higher rates. Fed funds futures
traders now expect rates to peak at 5.16% in July, and then fall
to 4.83% by December. On Thursday, a day before the release of
the jobs data, traders had expected the rate to peak at 4.88% in
June, and then fall to 4.40% by December. "A strong labor market ... raises the bar incrementally
higher for confidence around normalization in inflation," said
Jonathan Cohn, head of rates trading strategy at Credit Suisse
in New York. "It keeps the Fed in a position where they want to
lean hawkish until there's more clarity around the outlook."
Average hourly earnings increased 0.3% last month after a
rise of 0.4% in December, the Labor Department reported in its
monthly employment report on Friday. That lowered the
year-on-year increase in wages to 4.4%, the smallest rise since
August 2021, from 4.8% in December. But wage growth was revised
upward for 2022, suggesting a more moderate pace of cooling than
previously thought.
The release of the consumer price index report for January
on Feb. 14 will be the next major piece of U.S. economic data.
It is expected to show that headline prices rose 0.5% in the
month, while core prices increased 0.4%. Benchmark 10-year yields were last at 3.673%,
after reaching 3.690% on Tuesday, the highest since Jan. 6. They
are up from a low of 3.333% on Thursday.
Two-year yields were last at 4.465%, after
reaching 4.493% on Monday, also the highest since Jan. 6.
The Treasury Department will sell $35 billion in 10-year
notes on Wednesday, following a weak sale of $40 billion in
three-year notes on Tuesday.
Demand for the three-year notes was likely dented by
concerns that Powell would take a more hawkish tone on future
rate increases, with his comments coming at the same time as the
auction.
The Treasury will also sell $21 billion in 30-year bonds on
Thursday.
(Editing by Paul Simao)
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