The benchmark 10-year yield, which dropped to 1.469 per cent, the lowest since March 4, was last up 1.6 basis points on the day at 1.5771 per cent, holding below a 14-month high of 1.776 per cent reached on March 30. The 30-year yield tumbled to its lowest level since March 1 at 2.158 per cent. It was last 4.4 basis points higher at 2.28 per cent.
Nonfarm payrolls increased by only 266,000 jobs last month after rising by 770,000 in March, the Labor Department reported.
Economists polled by Reuters had forecast payrolls advancing by 978,000 jobs. The unexpected slowdown in job growth was likely due to shortages of workers and raw materials as the economy recovers from the coronavirus pandemic.
The yield drop was a “knee-jerk reaction” that faded as the session wore on and the market digested the data, according to analysts. “Despite a huge miss, which it was, it’s still employment going in the right direction,” said Andrew Richman, senior fixed income strategist at Sterling Capital Management.
John Canavan, lead analyst at Oxford Economics, said the report reinforced the idea the Federal Reserve can stick with its current monetary policy for longer, which led to intermediate yields outperforming longer-dated yields, steepening the yield curve between five-year notes and 30-year bonds.
It was last 6.87 basis points steeper at 150.60 basis points. “As market participants pile into curve-steepening trades, part of that results in selling of the long end,” Canavan said.
The most closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was about 2 basis points steeper at 143.20 basis points.
U.S. interest rate futures indicated that traders pushed out expectations of a Fed rate hike by roughly three months after the payrolls report’s release.
Eurodollar futures, which are a proxy for interest rate expectations, showed a 90 per cent chance of an interest rate hike in March 2023, and fully priced in a hike in June 2023. Prior to the report, investors were betting there was a 90 per cent chance of a hike in December 2022, and a 100 per cent chance in March 2023.
Inflation expectations temporarily eased in the wake of the jobs data, with the breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) falling as low as 2.586 per cent from 2.661 per cent at the previous close. It was last at 2.678 per cent, down from a 10-year high of 2.696 per cent reached on Wednesday.
The 10-year TIPS breakeven rate also rebounded after falling to 2.411 per cent. It rose to 2.503 per cent, the highest since April 2013, indicating the market sees inflation averaging 2.5 per cent a year for the next decade.
“The Fed’s being extremely easy here still. We have stimulus coming on. It’s inflationary in the short run,” Richman said.
The two-year Treasury yield, which typically moves in step with interest rate expectations, was last 1 basis point lower at 0.1468 per cent.
Next week will bring a burst of supply, with the U.S. Treasury auctioning $58 billion of three-year notes on Tuesday, $41 billion of 10-year notes on Wednesday, and $27 billion of 30-year bonds on Thursday.
