Yields march higher following better-than-expected labor data

NEW YORK, Jan 4 – US Treasury yields extended gains on Thursday, with the benchmark 10-year yield hovering around 4%, as data suggesting the US labor market remains strong tempered expectations of an interest rate cut by the Federal Reserve at its March meeting.

Futures markets are now pricing in a 35% chance that the Fed will keep rates at their current range of 5.25% to 5.5%, up from a 13% chance a week ago, according to CME’s FedWatch Tool. Markets estimate a 60% chance of a 25-basis-point rate cut in March.

The number of Americans filing initial claims for unemployment benefits, known as jobless claims, fell more than expected to 202,000 last week, below consensus estimates of 216,000, according to the Labor Department. New state unemployment benefit claims rose by 12,000 last week to 218,000.

At the same time, US private employers hired more workers than expected in December, according to the ADP National Employment Report. Private payrolls increased by 164,000 jobs last month, the largest monthly increase since August.

“People are looking at the labor market data and starting to second-guess whether that is enough for the Fed to cut rates,” said Matthew Routh, a portfolio manager at Barrow Hanley Global Investors.

The yield on 10-year Treasury notes was up 8.6 basis points to 3.993%. Its yield, which moves in the opposite direction of prices, briefly traded above 4% Wednesday, but has not maintained that level since falling below 4% in mid-December. Yields of the benchmark 10-year are up about 15 basis points over the first three trading days of the new year.

The yield on the 30-year Treasury bond was up 8.2 basis points at 4.139%. The two-year US Treasury yield, which typically moves in step with interest rate expectations, was up 6.7 basis points at 4.385%.

Minutes from the Fed’s December policy meeting released Wednesday showed a majority of policymakers see benchmark rates trimmed by at least three-quarters of a percentage point by the end of the year. Markets, meanwhile, are pricing in six rate cuts over the same time, totaling 140 basis points.

“The market is ahead of itself and is not listening to what the Fed is saying,” said Judith Raneri, a portfolio manager at Gabelli Funds. At the same time, increased corporate bond issuance will likely increase volatility in the fixed income market overall, she said.

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 -39.9 basis points. It fell to a low of -43.2 on Wednesday.

January 4 Thursday 3:30 PM New York / 2030 GMT

(Reporting by David Randall; editing by Jonathan Oatis)