Data lifts yields as 2-yr hits highest since 2007

NEW YORK, July 6 (Reuters) – US Treasury yields climbed on Thursday after data on the labor market further fueled expectations the Federal Reserve will be aggressive in raising interest rates as it tries to rein in persistently high inflation down towards its 2% target rate.

Private payrolls jumped by 497,000 jobs last month, the ADP National Employment report showed, well above the 228,000 forecast and indicating the labor market remains resilient despite the Fed’s efforts to slow the economy.

Other labor market data showed initial jobless claims increased slightly for the week ended July 1 to 248,000, just above the 245,000 estimate, but still below the 280,000 economists believe would indicate a significant slowing in job growth. In addition, a report from Challenger, Gray & Christmas announced the lowest number of layoffs by US-based employers since October 2022.

“This data has been unbelievable strong, especially the jobs data just for some reason continues to surprise to the upside,” said Tom di Galoma, co-head of global rates trading at BTIG in New York.

“I’m not sure where it is all coming from. I think we are headed into a slowdown but businesses are still looking for employees.”

The data comes ahead of Friday’s key payrolls report from the Labor Department, although the ADP report and the government’s jobs data have not historically been very tightly correlated.

The yield on 10-year Treasury notes was up 9.4 basis points to 4.039% after hitting 4.083%, its highest since March 2. The 10-year yield is on track for its third straight session of gains.

Interest rate futures were pricing in a 92.4% chance of a 25-basis-point rate hike at the Fed’s July 25-26 meeting, up from 90.5% a day prior, with expectations for a second hike at the November meeting also increasing.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 5.1 basis points at 5.002% after rising to 5.120%, the highest since June 2007.

Federal Reserve Bank of Dallas President Lorie Logan said Thursday that there was a case for a rate rise at the June policy meeting, when the central bank paused after 10 straight increases, and said more rate hikes are needed. Recent comments from other Fed officials, including Chair Jerome Powell, have supported additional hikes this year.

The yield on the 30-year Treasury bond was up 5.9 basis points to 4.003%. Analysts at Citi have pointed to 4% as the main resistance level, as yields “came off aggressively” in three prior instances. Citi would target 4.34% should the 30-year close above 4%.

Other data showed the services sector remains strong, growing faster than expected in June, although a measure of prices paid fell to its lowest in more than three years, hinting at further cooling of services inflation.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a negative 96.5 basis points after seeing its deepest inversion since 1981 on Monday.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.243%, after closing at 2.233% on Wednesday.

The 10-year TIPS breakeven rate was last at 2.272%, indicating the market sees inflation averaging 2.3% a year for the next decade.

(Reporting by Chuck Mikolajczak, additional reporting by Karen Brettell; Editing by Mark Potter and Nick Zieminski)