NEW YORK – US two-year Treasury yields saw the biggest drop since the 2008 financial crisis as yields across the curve plummeted after the February payrolls report, while investors continued to be risk-averse as they assessed possible ramifications from troubles in the banking sector.
Nonfarm payrolls increased by 311,000 last month, the Labor Department said, above the 205,000 estimate of economists polled by Reuters, while average hourly earnings rose by 0.2 percent in February, slightly below the expected 0.3 percent, giving hope that the Fed can be less aggressive in its path of interest rate hikes. January’s report was revised only slightly lower to 504,000 jobs from the previously announced 517,000.
“Combined with other jobs data we’ve had this week it’s becoming clear the US jobs market is cooling but likely not fast enough yet for the Fed,” said Frances Donald, chief economist and strategist at Manulife Investment Management in Montreal.
“In our view warm, but not too hot, jobs numbers are enough to cement a 25-basis-point hike for March, but the rise in the unemployment rate and a weaker-than-expected average hourly earnings increase will take some pressure off the need to increase by 50 basis points.”
The yield on 10-year Treasury notes was down 22.6 basis points at 3.697 percent. The yield was poised for its largest one-day drop since November 10.
Expectations for a larger rate hike by the Fed at its March 22 policy announcement lessened after the jobs data, with fed funds futures now projecting a 39.5 percent chance of a 50 basis-point hike, down from 68.3 percent on Thursday, according to CME’s FedWatch Tool.
The tumble in yields began on Thursday, in part due to worries about the banking sector, and contagion concerns stemming from troubles at SVB Financial. On Friday, the bank was shuttered by regulators, the largest bank failure since the financial crisis and weighed on other banks, primarily regional banks.
“There are obvious cracks in the system, and the worry is if the Fed raises rates (50 basis points) in two weeks, will that break something in the banking system. That’s why the banks are selling off and the market is nervous.”
The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 30.3 basis points at 4.597 percent. The yield is down about 45 basis points over the last two days, its biggest drop since the financial crisis in September 2008 after having just crossed 5 percent for the first time since 2007 earlier in the week. – Reuters
