(Bloomberg) -- Treasury two-year notes fell after a report showed the U.S. economy added more jobs than forecast in June, bolstering the case for the Federal Reserve to raise interest rates this year.
The yield on the two-year note, the coupon security most sensitive to Fed policy expectations, rose after the Labor Department said the U.S. created 287,000 jobs in June, the most in eight months, compared with the 180,000 median expectation in a Bloomberg survey of economists. The data, which Bank of America Corp. strategists this week called the most important payrolls report of 2016, mark the first month of above-forecast employment gains since March.
The data may put policy makers back on track to increase rates in the coming months, after futures traders slashed bets on a 2016 hike in the wake of a weak May jobs report and Britain's vote to leave the European Union. Minutes from the Fed's June meeting released July 6 showed uncertainty about labor-market conditions contributed to the decision to leave rates unchanged. Concern about fallout from the Brexit vote, which occurred after Fed officials met, fueled a global rally in haven assets that pushed Treasury 10- and 30-year yields to record lows.
“You expect to see some reversal now in yields, but I don't think we're going all the way to where we were before the May employment report because the view on the Fed has changed,” said Stephen Stanley, chief economist at Amherst Pierpont Securities LLC in New York. “I don't think anyone feels like there's much chance of a Fed move certainly before September.”
Yields Climb
Two-year note yields climbed three basis points, or 0.03 percentage point, to 0.62 percent as of 9:13 a.m. New York time, according to Bloomberg Bond Trader data.
Benchmark 10-year yields were little changed at 1.38 percent after erasing earlier losses.
“What's particularly interesting is the bond-market reaction, with the rise in yields initially capped, suggesting an enormous number of buyers waiting in the wings amid the recent move lower in global interest rates,” said Gennadiy Goldberg, an interest-rate strategist at TD Securities LLC in New York.
Treasury 10-year note yields rose Thursday from near record lows as reports showed applications for unemployment benefits fell to the lowest since April and private payrolls rose more than forecast.
The June payrolls climb exceeded the highest estimate in a Bloomberg survey, after a revised 11,000 gain in May. The jobless rate rose to 4.9 percent as more people entered the labor force. Wages advanced less than projected.
Futures traders assigned about a 22 percent probability of a Fed rate hike by year-end, up from about 17 percent before Friday's jobs report.
Policy makers' median forecast calls for one hike in 2016, after officials this year twice lowered their projected path for interest rates. The Federal Open Market Committee will next convene July 26-27.
To contact the reporters on this story: Brian Chappatta in New York at bchappatta1@bloomberg.net, Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Michael Aneiro, Mark Tannenbaum
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