Yields edge down before Friday’s US jobs report

Benchmark US 10-year Treasury yields dipped on Thursday as investors waited to see if Friday’s employment report for May would show cooling in the labor market as traders bet on Federal Reserve rate cuts later this year.

Bonds have rallied this week as investors price for the likelihood that the Fed could begin cutting rates as soon as September as the economy softens.

Inflation easing closer to the US central bank’s 2% annual target is key to when the Fed cuts and how many rate reductions are likely this year.

“The next month or two in terms of data is going to be very, very telling,” said Scott McIntyre, senior portfolio manager at HilltopSecurities Asset Management in Austin, Texas.

“We’re at this pivot point where investors are wondering whether the hot first quarter numbers are going to cool in the second quarter,” McIntyre said. “We’re just now getting numbers for May so that hasn’t been determined yet.”

Benchmark 10-year note yields were last down 1 basis point on the day at 4.281%. They got as low as 4.275% on Wednesday, the lowest since April 1.

Two-year note yields dipped 1 basis point to 4.720% and got as low as 4.718%, the lowest since May 16.

The inversion in the two-year, 10-year yield curve narrowed 1 basis point to minus 44 basis points.

Traders said that the absence of fresh Treasury supply had supported the market this week after some soft bond auctions last week.

However, investors have also positioned for softer jobs data on Friday, with the possibility that jobs gains will come in below the median economist forecast of 185,000 jobs.

April’s report showed that jobs growth slowed more than expected, with 175,000 jobs gains, the fewest in six months.

Economists at Goldman Sachs said on Thursday that they expect 160,000 job additions in May.

“When the labor market is tight, job growth tends to slow disproportionately during the spring hiring season and particularly in May – when the seasonal factors expect more hiring than is realistic with fewer workers available,” they said in a report.

Data this week has pointed to more balance in the labor market.

The ADP Employment Report on Wednesday showed that private payrolls increased by 152,000 jobs last month, below economists’ forecasts for 175,000 in jobs gains.

A survey on Tuesday also showed that job openings, a measure of labor demand, were down 296,000 to 8.059 million on the last day of April, the lowest level since February 2021.

Data on Thursday showed that the number of Americans filing new claims for unemployment benefits increased last week. US worker productivity also grew slightly less than previously estimated in the first quarter but exceeded market expectations, and unit labor costs rose by less than first thought.

Wage data in Friday’s jobs report will be closely watched as inflation remains the key focus for Fed policy.

“Average hourly earnings realistically are probably the most important component, I think, because that feeds into inflation, and inflation right now is priority one for the Fed,” McIntyre said.

Next week’s consumer price index (CPI) report for May will then be key to guiding near-term Fed expectations. Fed officials have stressed that they want to see several months of improving inflation before easing policy.

The consumer price inflation report will come on Wednesday, before the US central bank is due to complete a two-day policy meeting at which Fed officials will update their economic and interest rate projections.

(Reporting By Karen Brettell; Editing by Christina Fincher, Will Dunham and David Evans)