(Bloomberg) -- The inflation-adjusted yield on Treasuries maturing in three decades' time climbed above zero for the first time since June after stronger-than-anticipated U.S. jobs data added fuel to the argument for faster tightening of Federal Reserve policy.
The so-called 30-year real yield, as measured by Treasury inflation-protected securities, jumped 7 basis points to 0.08%, a level unseen since May. The last time the benchmark was above zero was in June. Nominal Treasuries slid to their lows of the day following the employment data, with the front-end and belly of the curve leading declines.
Swaps markets showed around 32 basis points of tightening priced in for the Fed's March meeting, slightly more than before, suggesting the market sees at least a quarter point of tightening as a done deal and around a one-in-four chance of a super-sized half-point rate increase. Around 130 basis points of increases are priced for the whole of 2022.
Nonfarm payrolls increased 467,000 in January after an upwardly revised 510,000 gain in December, surprising economists who had expected a surge in Covid-19 infections may have frozen hiring. The highest estimate in a Bloomberg survey was for an increase of 250,000 jobs. Wage growth accelerated, adding evidence that a tight labor market may fuel inflation.
“Definitely here the surprise, this is telling us just how overheated this labor market is,” Jeffrey Rosenberg, a senior portfolio manager at BlackRock Inc., said on Bloomberg Television. “The market is pricing this acceleration in near-term tightening and I think that will remain the theme here for a while.
Fed Chair Jerome Powell signaled last month the central bank is likely to begin a cycle of interest-rate hikes in March and opened the door to more frequent and potentially larger hikes than anticipated. The jump in real yields has already unsettled risk assets, which are grappling with the end of accommodative monetary policy after rallying over the pandemic. The Nasdaq 100 -- which includes growth stocks particularly sensitive to rising rates -- fell into a correction last month.
The selloff in Treasuries pushed rates on two- and five-year notes to their highest levels in at least two years, helping to flatten the yield curve. The three-year rate climbed 11 basis points to 1.53%, while yields on 30-year bonds climbed to 2.23%, the highest since June.
The 10-year benchmark has surpassed 1.92%, a strike level in the March options where dealers remain significantly short puts. The hedging effect around this level could see additional price swings in Treasuries.
It's already been a tough start to a year for Treasury investors. U.S. government bonds lost about 2.1% this year through Thursday, according to the Bloomberg U.S. Treasury Total Return Index. The loss is already approaching the full-year decline of 2.3% last year, which was the first annual decline since 2013.
“We have to price in more risk that the Fed goes really aggressively, so we're seeing most of the pressure on the front end of the curve,” said Michael Cloherty, head of U.S. rates strategy at UBS Securities. “As central banks get tighter that should push up real rates.”
Globally, central banks are turning increasingly hawkish to combat inflation that is running at multi-decade highs in many places. On Thursday, the Bank of England raised rates by a quarter point, in a decision where only the opposition of Governor Andrew Bailey prevented an even bigger move. Hours later, European Central Bank President Christine Lagarde refused to rule out an interest-rate hike this year, a pivot toward the tightening stance of global peers.
As central banks normalize their pandemic policy, the world's enormous pool of negative-yielding debt is dwindling at a record pace. In both Germany and Japan, the world's major bastions of negative rates, five-year yields climbed above zero on Friday for the first time in years.
“I think the game here for all central banks is to talk very tough today in the hope that they don't need to deliver it all later,” said James Athey, investment director at Aberdeen Asset Management, who is positioned for continued flattenning of the Treasury yield curve. “It's a ‘buy time and credibility' strategy as the path of least regret. A coordinated tightening cycle isn't going to be good news for risk assets.”
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