US yields lose steam after payrolls report

NEW YORK, July 7 (Reuters) – US Treasury yields moved lower on Friday, although longer-dated yields were higher on the session, after a reading on the labor market calmed concerns the Federal Reserve would aggressively raise interest rates.

Nonfarm payrolls increased by 209,000 jobs in June, the Labor Department said, shy of the 225,000 estimate of economists polled by Reuters. The unemployment rate slipped to 3.6% from 3.7% in May, indicating the labor market remains tight.

The yield on 10-year Treasury notes was down 1.7 basis points to 4.024% after earlier rising to 4.094%.

Yields jumped on Thursday after a flurry of data, including a much stronger-than-expected report on private payrolls in the ADP National Employment that fueled fears the Fed would need to be hawkish in taking steps to control stubbornly high inflation.

“The market kind of overreacted a little bit and we’ve kind of seen that reverse today when we kind of got the calm down, if you will, after the actual jobs report came out,” said Sam Millette, Fixed Income Strategist at Commonwealth Financial Network in Boston.

“We have seen a lot of news come in that the economy has been a little bit more resilient than expected so, it could have been sort of a last straw on the camel’s back situation with ADP yesterday, but today’s report sort of poured some water on that.”

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down 10.4 basis points at 4.902% after hitting a 16-year high of 5.12% on Thursday.

Expectations for a 25-basis-point rate hike from the Fed at its July 25-26 meeting stand at 94.9%, up from 91.8% a day prior, according to CME’s FedWatch Tool. However, traders priced in a lower chance of any further increases later in the year.

The yield on the 30-year Treasury bond was up 1.8 basis points to 4.021%.

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 88.0 basis points.

The spread had its deepest inversion since 1981 earlier in the week.

The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.234%, after closing at 2.249% on Thursday, its highest close in just over two months.

The 10-year TIPS breakeven rate was last at 2.274%, indicating the market expects inflation to average 2.27% a year for the next decade.

(Reporting by Chuck Mikolajczak; editing by Barbara Lewis)