Treasuries Ignore Jobs Data as Ukraine War Controls Sentiment

(Bloomberg) -- Treasuries reacted minimally to mixed February employment data Friday, holding part of the advance that came after Ukrainian officials said invading Russia forces ignited a fire at Europe's largest nuclear plant.

Yields remained lower across the curve led by the 10-year, down about 11 basis points at 1.74%, about five basis points lower than where it stood before the U.S. jobs report showed hiring boomed in February while wage growth slowed. While labor market conditions appear strong enough to withstand expected Federal Reserve rate hikes to curb inflation, the financial repercussions of the Russian invasion and resulting sanctions have begun to cast doubt on how much rates will rise.

Job growth and the unemployment rate “are both showing the economy remains strong, and keeps the pressure on for the Fed to deliver hikes in the months ahead,” said Padhraic Garvey, head of global debt and rate strategy at ING Financial Markets. But weakness in wage growth “gives the market the excuse to do what it wants to do into the weekend,” which is “to go for safety at the margin, at least for today, biasing rates lower.”

Treasuries peaked during Asia trading hours after Ukraine's Foreign Minister Dmytro Kuleba said a blaze broke out at the Zaporizhzhia plant and called on Russia's military to immediately stop shooting. Gains were pared after reports that it had been extinguished.

“Markets remain at the mercy of unpredictable Russia/Ukraine headlines, and this latest news regarding the Zaporizhzhia nuclear plant has caused an instant reaction,” said Andrew Ticehurst, a rates strategist at Nomura Inc. in Sydney. “Particularly heading into a weekend, it would seem likely that investors could continue to reduce risk, and the dollar and Treasuries appear to be the safe haven of choice.”

U.S. 10-year yields dropped as much as 14 basis points to 1.70%. The yield curve continued to flatten, with the gap between two-year and 10-year notes narrowing to 25 basis points, the lowest since March 2020.

The rates market has all but fully priced in a 25 basis-point increase of the Fed's benchmark borrowing costs at the March 16 policy meeting after Fed Chair Jerome Powell said he favors such a move to kick off an expected series of hikes this year. Traders are betting that the Fed will raise rates about six times this year to boost the benchmark Fed fund rate to about 1.5%.

Nonfarm payrolls increased 678,000 last month -- the most since July -- after upward revisions in the prior two months, a Labor Department report showed Friday. The unemployment rate edged down to 3.8%, average hourly earnings were flat, and the labor participation rate rose slightly.

Risk aversion added to the strains apparent in global money markets, with a gauge of banking industry risk climbing after jumping on Thursday by the most since the 2020 liquidity crisis.

The FRA/OIS spread -- the gap between interbank rates relative to overnight lending benchmarks -- expanded as much as four basis points to 29.7 basis points, the widest spread since May 2020. A similar gauge in Australia hit levels last seen in April 2020. Japan's three-month basis swaps dropped below minus 50 basis points for the second time this week as demand for dollar funding hovered around priciest levels for yen-based traders since March 2020.

“Risk off is clearly evident and highlights the risk that the market is underestimating Putin's resolve and level of aggression,” said Rodrigo Catril, a currency strategist National Australia Bank Ltd. in Sydney.