US yields drop as unemployment rises in September

NEW YORK – US Treasury yields fell on Thursday after data showed that the US unemployment rate rose in September even as employers added more jobs than economists had expected during the month, with traders now seeing an increasing chance of a Federal Reserve rate cut in December.

Nonfarm payrolls increased by 119,000 jobs in September. Economists polled by Reuters had forecast 50,000 jobs would be added. The unemployment rate rose to 4.4%, from 4.3% in August.

“Depending on your priors from the Fed, it probably gives both the hawks and the doves something to confirm what they thought,” said Jan Nevruzi, US rates strategist at TD Securities in New York.

Treasuries rallied, however, with yields falling, as traders brought the pricing of a December rate cut back closer to 50-50, he said.

Traders have repriced for falling odds of a December rate cut in the past week as many Fed policymakers express concerns about further easing due to still elevated inflation.

Fed funds futures traders are now pricing in a 39% chance of a December rate cut, up from 30% on Wednesday, according to the CME Group’s FedWatch Tool.

The 2-year note yield, which typically moves in step with Fed rate expectations, was last down 3.8 basis points on the day at 3.56%. The yield on benchmark US 10-year notes fell 2.1 basis points to 4.11%.

The two-year, 10-year Treasury yield curve steepened to 54.8 basis points.

Other data on Thursday showed that the number of Americans filing new applications for unemployment benefits fell last week.

The federal government is pushing out delayed economic reports after reopening last week from a record 43-day shutdown. The data fog is adding to uncertainty over Fed policy as many policymakers express concerns about further rate cuts due to sticky inflation.

The US Bureau of Labor Statistics said on Wednesday it will release a combined jobs report
for October and November on December 16, after the Fed’s December 9-10 policy meeting. The October data will lack the unemployment rate, however, as it was unable to collect the data during the shutdown.

Minutes from the Fed’s October meeting, released on Wednesday, show that a divided Fed cut interest rate last month even as policymakers cautioned that doing so could risk entrenched inflation and a loss of public trust in the US central bank.

The Treasury will sell USD 19 billion in 10-year Treasury Inflation-Protected Securities on Thursday.

(Reporting by Karen Brettell, editing by Deepa Babington and Chizu Nomiyama )