U.S. government bond yields reached new levels of inversion -- including the two-year rate exceeding the 30-year for first time since 2007 -- after a strong jobs report bolstered bets that the Federal Reserve will increase the size of its next interest-rate hike.
Yields rose across the curve, with the biggest gains seen in shorter-term securities that are highly sensitive to Fed moves.
Two-year yields climbed 10 basis points to 2.44%, putting them more than 1 basis point above the 30-year rate and 7 basis points higher than those on 10-year Treasuries. The moves join inversions on other parts of the curve, including the five-year and 30-year segment, signaling traders expect that the Fed’s tightening will slow growth and cool inflation over time.
Swaps contracts are pricing in around 46 basis points of Fed tightening at its next meeting in May, up from about 44 on Thursday. That shows widespread expectation that policymakers will increase interest rates by half a percentage point at the gathering, which would be the steepest increase since 2000. Around 216 basis points of tightening are priced for the rest of 2022, including the May meeting.
Last month, the Fed raised rates by a quarter percentage point, its first such move since the onset of the pandemic.
“The jobs report could push the Fed towards a 50-basis-points increase at their May meeting,” said Tom di Galoma, managing director of government trading and strategy at Seaport Global, noting the fall in the unemployment rate and the accelerating increase in average hourly earnings.
Nonfarm payrolls increased 431,000 last month after an upwardly revised 750,000 gain in February, the Labor Department report showed. The unemployment rate fell to 3.6%, near its pre-pandemic low, and the labor-force participation rate ticked up. Friday’s report showed average hourly earnings rose 0.4% from February and 5.6% from a year ago, the most since May 2020.
Fed officials, including Chair Jerome Powell, have said in recent weeks that they would support more aggressive monetary policy to curb decades-high inflation, including a possible 50-basis-point hike at the next policy meeting. Central bankers have repeatedly pointed to a strong labor market as one reason that the U.S. economy can handle a series of interest-rate hikes that’s expected to extend into next year.
Some of the inversion to the yield curve may reflect trading positions as much as speculation about slowing growth, with some investors repositioning what had been a popular bet during the first quarter that the gap between long- and short-yields would narrow.
“This is a Fed that wants to get out in front of the curve, and that means a very accelerated pace of tightening,” Jeffrey Rosenberg, senior portfolio manager for systematic multi-strategy at BlackRock Inc., said on Bloomberg Television.