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Treasury yields extended their decline in afternoon trading on Friday as the latest US jobs report cemented expectations that Fed policy makers will raise interest rates next week.

Yield on the 10-year note, which moves inversely to price, fell 2.9 basis points to 2.57 per cent, following a sharp run up this week that pushed it to a 3 month high of 2.6218 per cent this morning ahead of the jobs report’s release.

The 2-year yield, which is more sensitive to policy changes, eased 2.7bps to 1.3513 per cent. It had traded as high as 1.3838 per cent earlier in the day.

“The employment report was only ever going to be notable in the case of a significant disappointment either in the actual print or in the average earnings’ numbers and, on balance, all remains on track,” said Richard de Meo, managing director of Foenix Partners.

So while a March rate hike is largely seen as a done deal, the pullback in Treasury yields reflect the fact there was little in the report – which showed solid payroll growth and an uptick in wage growth – that would dramatically alter the market’s expectations over the pace Fed rate increases for the remainder of the year.

“We sense that the current optimism on the US outlook may be tempered somewhat with Congress likely to push back against some of President Trump’s more aggressive fiscal stimulus plans,” said James Knightley, senior economist at ING.

“We also think that the Fed will increasingly focus on balance sheet adjustment as a way of doing some of the heavy lifting. If the Fed reduces or stops the reinvestment of maturing bonds from its QE holdings this will remove a key buyer of Treasuries from the market. This should push longer dated yields higher, reducing the need for rate hikes at the short-end.”

Copyright The Financial Times Limited 2017. All rights reserved.
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