NEW YORK- US Treasury yields dropped sharply on Friday following data that showed the US economy added fewer jobs than expected in July, but investors hesitated to rule out further monetary tightening as the labor market continued to look resilient.
Nonfarm payrolls increased by 187,000 jobs last month, the Labor Department said, below economists’ expectations that they would have risen by 200,000. Average hourly earnings, however, surprised on the upside, rising 4.4 percent from a year earlier, and the unemployment rate edged down to 3.5 percent .
“Overall, this report doesn’t really change our thinking — the labor market is slowly decelerating, but we think a sharper slowdown is still ultimately necessary to keep inflation from reaccelerating next year,” said Tiffany Wilding, managing director and economist at PIMCO.
Benchmark US 10-year yields which move inversely to prices, fell by nearly 13 basis points to 4.062 percent , posting their largest daily fall since July 12.
On the short end of the curve, two-year yields considered to reflect monetary policy expectations more closely, were down about 11 basis points to 4.791 percent , a two-week low.
The 2/10 yield curve which plots the yields of the two maturities against each other and is a harbinger of an upcoming recession when inverted, was last at minus 73.9 basis points but hit an intra-day high of minus 68 bps – the least inverted it has been since late May.
Friday’s data, while pushing yields lower, did little to change the market view that the “soft-landing” scenario for the economy envisaged by the US Federal Reserve is possible.
It followed on from economic data this week pointing to a still tight labor market resilient to hefty increases in interest rates by the Fed.
“There’s a momentum already built in this week… and I don’t think this report gave us enough, based on wage data, to squash that trend that’s already been developing,” said Matthew Miskin, co-chief investment strategist at John Hancock Investment Management.
Yields have been rising sharply this week with the 10-year hitting its highest level since October last year.
