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Bond Report: Treasury yields turn mixed as data shows U.S. gaining just 199,000 jobs in December

Treasury yields turn mixed on Friday after a December jobs report showed a disappointing 199,000 new jobs created and investors assessed the impact of the data on the likely start of the Federal Reserve’s next rate-hike cycle in coming months.

What are yields doing?

The yield on the 10-year Treasury note TMUBMUSD10Y, 1.758% was at 1.747%, up from 1.733% at 3 p.m. Eastern on Thursday. Yields and debt prices move opposite each other.
The 2-year Treasury yield TMUBMUSD02Y, 0.886% was 0.8882% versus 0.88% late Thursday afternoon.
The 30-year Treasury bond TMUBMUSD30Y, 2.109% yield was 2.085%, down from 2.093% on Thursday afternoon.
Based on Thursday’s 3 p.m. levels, the 2-year yield climbed to its highest since Feb. 27, 2020, while the 10-year yield was the highest since March 31 and the 30-year rate was the highest since Oct. 21. Long-end yields have risen for four consecutive sessions to begin 2022, with the 10-year rate rising 23.7 basis points through Thursday.

What’s driving yields?

December’s lackluster jobs report signaled that persistent labor shortages and another major coronavirus outbreak are holding back the economy, with only 199,000 new jobs created. The data was expected to show nonfarm payrolls rose by 422,000, according to economists surveyed by The Wall Street Journal. Meanwhile, the unemployment rate slipped to 3.9% from 4.2%.

Some economists said the December report suggests that worker shortages were becoming a bigger restraint on employment growth, but the falling unemployment rate will likely result in rapid and sustained wage growth.

Investors have been increasingly penciling in prospects for a rate hike by the Federal Reserve in March, when the central bank is on track to have fully wound down its monthly asset purchases. Minutes of the Fed’s December policy meeting, released Wednesday, showed that officials felt it might be necessary “to increase the federal-funds rate sooner or at a faster pace than participants had earlier anticipated.” The summary also showed that Fed officials had a wide-ranging discussion of how to move away from its current easy stance by hiking rates and shrinking its balance sheet.

On Thursday, St. Louis Fed President James Bullard said the first rate increase could come as soon as March, and a balance sheet runoff is one of possible next steps for monetary policy. Bullard is a 2022 voting member of the rate-setting Federal Open Market Committee.

San Francisco Fed President Mary Daly is scheduled to participate in a panel discussion about Fed policy at the American Economics Association annual meeting at 10 a.m. Eastern time. Atlanta Fed President Raphael Bostic is slated to discuss the economy at 12:15 p.m.

November consumer-credit data is due at 3 p.m.

What are analysts saying?

The key takeaway for the Fed from Friday’s jobs report “is that, with few signs of a recovery in labor supply, the continued decline in the unemployment rate and surge in wage growth looks set to be sustained over 2022,” said Michael Pearce, senior U.S. economist for Capital Economics, in a note.

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