US yields climb as ADP data shows solid job growth amid Middle East conflict

NEW YORK – Longer-dated US Treasury yields rose on Wednesday after economic data pointed to a stable labor market while investors monitored escalating Middle East hostilities after Iran fired missiles against Israel.

US private payrolls increased by a more than expected 143,000 jobs in September, according to the ADP National Employment Report, above the 120,000 estimate of economists polled by Reuters, adding to signs the labor market may not be cooling as fast as some initial concerns.

Yields had moved sharply lower in the prior session as Iran launched more than 180 missiles against Israel in an escalation of tensions in the region.

On Wednesday, Israel said eight of its soldiers were killed in combat in south Lebanon as its forces moved into its northern neighbor in a campaign against the Hezbollah armed group.

The US data comes ahead of the release on Friday of the government’s more comprehensive employment report for September. Federal Reserve Chair Jerome Powell and other central bank officials have signaled the Fed’s primary focus has shifted from combating inflation to ensuring a stable labor market.

The Fed kicked off its rate cut cycle in September with a big 50 basis point reduction.

The yield on 10-year Treasury notes was up 4 basis points at 3.783%. The yield has fallen for five straight months, including a third-quarter drop of more than 50 basis points as investors have anticipated an easier monetary policy from the Fed.

“The one thing to keep in mind is we’d had a rip-roaring rally, in reaction to what has been a handful of months of slower data, moderating inflation, that got capped with the Fed cutting interest rates 50 basis points,” said Robert Tipp, chief Investment Strategist and head of global bonds at PGIM Fixed Income in Newark, New Jersey.

“This market had come a long way very fast and yesterday’s geopolitical risk took down another rung but given 12 hours to think about it and nothing more grave developing set the markets up to get back some of the rally.

“With a mild-upside surprise on ADP it’s giving the market some natural pause here, to reflect on whether it’s overreacted to all the bullish data of recent weeks and months.”

Richmond Fed President Thomas Barkin said the central bank’s cut in September was an acknowledgement that its policy rate was “out of sync” with where the economy stands, but shouldn’t be seen as a sign the battle with inflation is finished.

Expectations for another cut of 50 bps at the November meeting have been decreasing recently, with markets pricing in a 34.7% chance, down from 57.4% a week ago, according to CME’s FedWatch Tool.

The yield on the 30-year Treasury bond rose 5.2 bps to 4.133%.

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 positive 14.6 bps.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, edged up 1.4 bps at 3.635%.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.13%, after closing at 2.097% on Tuesday, its highest close since July 31.

The 10-year TIPS breakeven rate was last at 2.217%, indicating the market sees inflation averaging 2.2% a year for the next decade.

(Reporting by Chuck Mikolajczak; Editing by Emelia Sithole-Matarise and Nick Zieminski)