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US yield curve flattens after data supports Sept hike

Bond traders at CME Group
Getty Images

U.S. bond prices rose after earlier dropping on Friday as all-important non-farm payrolls data fell short of forecasts.

The yield on the benchmark 10-year Treasury notes last fell to 2.206 percent, after closing at 2.234 percent on Thursday. The yield on the 30-year Treasury bond last fell to 2.861 percent.

Symbol
Yield
 
Change
%Change
US 3-MO
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US 1-YR
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US 2-YR
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US 5-YR
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US 10-YR
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US 30-YR
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While payrolls missed a forecast for an increase of 223,000 by economists in a Reuters poll, the report still showed improvement. Payrolls data for May and June were revised to show 14,000 more jobs created than previously reported. In addition, the average workweek increased to 34.6 hours, the highest since February.

The "curve flattener" trade of slightly higher short-term yields and lower long-term yields showed traders leaning toward the view that the Fed was on track to raise interest rates for the first time in nearly a decade next month, analysts said.

The yield spread between five-year and 30-year Treasuries was at 125 basis points after the data, marking the tightest spread since April. Bond yields move inversely to prices.

""The number didn't give the market a surprise here, it just reinforced expectations for higher rates in September," said Sharon Stark, chief fixed income strategist at D.A. Davidson & Co in St. Petersburg, Florida.

The curve has flattened since short-dated prices are expected to weaken once the Fed raises rates, while the lower inflation expected to come with rate hikes is beneficial to longer-dated Treasuries since it preserves the value of interest payouts.

"The 30-year yield broke down after the report came out, exactly because of that concern, because what if the Fed raises rates, what will it do with long-term inflation expectations? It will deter inflation," said Robbert Van Batenburg, director of market strategy at Societe Generale in New York.

U.S. two-year notes were last down 2/32 in price to yield 0.74 percent, from 0.71 percent late Thursday. U.S. 30-year bonds were last up 25/32 in price to yield 2.87 percent, from 2.91 percent late Thursday.

Benchmark 10-year notes were last up 5/32 in price to yield 2.22 percent, from a yield of 2.23 percent late Thursday.