Yields on 10- and 30-year U.S. government debt fell to their lowest levels in months on Friday, while chalking up their biggest weekly declines since June 2020, after a report showed a disappointing 210,000 jobs added in November in the face of a severe labor shortage.
The Treasury curve narrowed to levels not seen in more than a year, a day after multiple cases of the omicron variant were detected in New York and raised more questions about the new strain’s impact on the global economic recovery.
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What are yields going?
The 10-year Treasury note
yield fell 10.5 basis points to 1.342%, the lowest level since Sept. 22, from 1.447% at 3 p.m. Eastern time on Thursday, according to Dow Jones Market Data. Yields fall as prices for Treasurys rise.
The yield on the 30-year TreasuryBX:TMUBMUSD30Y, aka the long bond, fell 9.3 basis points to 1.675%, the lowest since Jan. 4, based on 3 p.m. levels. That’s dow from 1.768% on Thursday.
For the week, the 10-year rate fell 14.2 basis points and the 30-year yield dropped 15.5 basis points, marking the largest weekly declines since June 12, 2020.
The 2-year Treasury note
yield fell 2.8 basis points to 0.589%, compared with 0.617% a day ago. Still, the yield, closely associated with the near-term path of the Federal Reserve’s policy rate, rose 7.1 basis points this week.
What’s driving the market?
The gain of 210,000 new jobs last month fell way below Wall Street expectations, and showed the worst labor shortage in decades is still a drag on the recovery. Economists polled by The Wall Street Journal had forecast 573,000 new jobs. Meanwhile, the jobless rate fell to 4.2% from 4.6%, as businesses took more aggressive steps to hire people, while average hourly earnings climbed 4.8% in the 12 months that ended in November.
The disappointing jobs gain dimmed investor sentiment. U.S. stock benchmarks relinquished solid opening gains on Friday as investors headed for havens like gold and Treasurys, which pushed yields lower.
On Friday, the widely followed spread between 2- and 10-year rates shrank below 75 basis points, marking the narrowest since Nov. 30, 2020, according to Tradeweb data. And the gap between 5- and 30-year yields narrowed to 55 basis points, a level not seen since March 9, 2020. Such moves usually imply that investors hold a downbeat longer-term outlook for the economy.
Analysts say the lackluster jobs gain isn’t likely to alter the Federal Reserve’s plan to accelerate the scaling back of its monthly bond purchases at policy makers’ next meeting in less than two weeks. Fed Chairman Jerome Powell and other members of the central bank’s rate-setting committee have suggested that a faster tapering of asset purchases could be warranted to combat rising inflation pressures.
Earlier this week, Powell surprised market participants by opening the door to speeding the tapering process when policy makers meet later this month. He also said he wanted to retire the word “transitory” when referring to inflation.
Next week, the Fed enters a media blackout period ahead of its Dec. 14-15 policy gathering, its last one of 2021.
In other data releases Friday, the final November reading of IHS Markit’s purchasing managers index geared to the service sector came in at 58 versus an initial reading of 57. The more closely watched services reading from the Institute for Supply Management rose to 69.1 in November from 66.7, above forecasts, with a reading of 50 or better indicating improving conditions. And U.S. factory orders were up by 1% in October.
What analysts are saying
“The ostensibly disappointing November U.S. employment report released today has not dented expectations for near-term monetary tightening in the U.S. at all, perhaps because of the growing signs this week that Fed officials have become more concerned about inflation,” said Oliver Jones, senior markets economist for Capital Economics. “If policy makers are indeed determined to press ahead with tightening next year, even as the recoveries in the economy and labor market potentially slow, we could well see the Treasury yield curve flatten further.”
With regard to the 10-year yield, “our take is that 1.30% is vulnerable during the overnight session,” said BMO Captal Markets strategist Ian Lyngen. Meanwhile, “30s at 1.68% will look richer before they reverse, but the next 25 bp in the long bond will be higher not lower.”