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TREASURIES-U.S. bond yields climb but show caution ahead of payrolls data

(Updates market action, adds quote)

* Yields hit 9-year peak on private hiring data

* U.S. private jobs growth strongest in 9 months in Dec -ADP

* Traders raise bets on Fed interest rate hike in March

* U.S. yield curve moves near flattest level in a decade

NEW YORK, Jan 4 (Reuters) - Yields on U.S. government bonds rose modestly on Thursday, a day before the December payrolls report, which is expected to show further improvement in the jobs market, though some traders worry that wage growth may fall short of expectations. Two-year Treasury yields reached a nine-year peak earlier on Thursday on stronger-than-expected data on private employment in December from ADP, which stoked bets the Federal Reserve may raise interest rates at its March policy meeting. The selling in Treasuries slowed on renewed concerns over whether wage growth is accelerating and propelling inflation closer to the Fed's target of 2 percent. The U.S. Labor Department will report jobs data for December at 8:30 a.m. (1230 GMT) Friday. Nonfarm payrolls are forecast to increase by 190,000 after surging by 228,000 in November, with the unemployment rate steady at 4.1 percent, according to Thomson Reuters. Theres probably a little bit of caution going into the employment figure tomorrow, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale, in New York. The focus will be on average hourly earnings which is, for the most part, what has driven expectations of inflation and wage growth, Rajappa said. The market will be watching whether there are nascent signs of a pickup in wages. That said, the front end of the curve remained under pressure after the robust December ADP data and hawkish views expressed in the Feds latest policy minutes released on Wednesday raised the chances of an interest-rate hike in March. U.S. companies added 250,000 workers in December, the biggest monthly increase since March, the ADP National Employment Report showed earlier on Thursday. The data boosted bets in the futures market of a possible rate hike at the Fed's March 20-21 policy meeting. Federal funds futures implied traders saw a 73 percent chance of a quarter-point rate increase to 1.50 percent-1.75 percent in March, up from 68 percent late on Wednesday, according to CME Group's FedWatch. At 3:24 p.m., two-year yields were at 1.960 percent after hitting 1.976 percent earlier in the day, the highest level since October 2008. The five-year yield was 2.270 percent, down from 2.292 percent, its highest level since April 2011. Perception of a possible March rate increase weighed the yield curve to near its flattest level in a decade as shorter-dated yields rose more than longer-dated ones. The spread between five-year and 30-year Treasury yields narrowed to 51.6 basis points, about 1 basis point short of the flattest level in a decade set earlier this week. Benchmark 10-year Treasury yields were 2.454 percent, down from a high of 2.485 percent on Thursday morning. January 4 Thursday 3:27PM New York / 2027 GMT Price

US T BONDS MAR8 152-9/32 -0-1/32 10YR TNotes MAR8 123-172/256 -0-28/25

6

Price Current Net Yield % Change

(bps)

Three-month bills 1.38 1.404 0.000 Six-month bills 1.56 1.5942 0.002 Two-year note 99-214/256 1.9596 0.025 Three-year note 99-134/256 2.0426 0.028 Five-year note 99-82/256 2.2699 0.024 Seven-year note 99-36/256 2.3842 0.017 10-year note 98-56/256 2.4543 0.009 30-year bond 99-64/256 2.7871 0.004

DOLLAR SWAP SPREADS

Last (bps) Net

Change (bps)

U.S. 2-year dollar swap 18.25 0.50

spread

U.S. 3-year dollar swap 19.25 0.75

spread

U.S. 5-year dollar swap 4.25 0.50

spread

U.S. 10-year dollar swap -1.00 0.75

spread

U.S. 30-year dollar swap -20.50 0.00

spread

(Reporting by Kate Duguid; Additional reporting by Richard Leong; Editing by Leslie Adler)