(Bloomberg) -- Short-dated Treasuries outperformed longer maturities after a report showed the U.S. added fewer jobs than forecast in September, leading traders to pare bets that the Federal Reserve will raise interest rates next month.
Yields on two-year notes, the coupon securities most sensitive to Fed policy expectations, fell for the first time in six days after a Labor Department report showed employers added 156,000 positions last month, versus a median forecast of 172,000 in a Bloomberg survey of economists. The increase followed a rise in August that was more than previously estimated.
While the data may dim speculation of a rate hike as soon as the Fed's Nov. 2 decision, six days before the U.S. presidential election, traders saw little change in the outlook for policy tightening by year-end. Reports this week showing service-sector expansion and declining jobless claims pushed traders to add to bets on a quarter-point rate increase by December, a year after the Fed's liftoff from near zero. Officials repeatedly pared projections for the path of rates this year amid inconsistent U.S. economic data and signs of stalling global growth.
"The steepening trade is being put on in a big fashion -- we have a ridiculously flat curve for this stage of this cycle,” said David Keeble, New York-based head of fixed-income strategy at Credit Agricole SA. “The jobs report may keep the Fed slower for longer" and “definitely takes November off the table."
Yield Curve
U.S. two-year note yields fell two basis points, or 0.02 percent, to 0.83 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 0.75 percent security due in September 2018 was 99 27/32.
The benchmark 10-year note yield fell two basis points to 1.72 percent.
The extra yield that investors demand to own 30-year bonds instead of two-year notes increased to about 1.62 percentage points. The gap, a measure of the yield curve, has rebounded from about 1.4 percentage points in August, the lowest since 2008.
Traders saw about a 17 percent probability of a rate increase in November, down from about 24 percent before the report's release, according to futures data compiled by Bloomberg. For a hike by December, the probability was 64 percent, little changed from before the release. The calculation is based on the assumption the effective fed funds rate will trade at the middle of the new range after the central bank's next boost.
December Outlook
“This keeps the Fed on the table for December,” said John Briggs, head of strategy for the Americas at RBS Securities Inc. in Stamford, Connecticut, one of 23 primary dealers that trade with the central bank. “But December's a long time away. There are a lot of factors that come into play before then even outside of domestic events like the election.”
Fed Vice Chairman Stanley Fischer on Friday said joblessness was close to its lowest sustainable level while drawing a contrast with weak economic expansion.
“The problem in the economy is the difference between the remarkable success of policy at reducing unemployment,” and “the very low rate of growth” in gross domestic product, said Fischer, speaking Friday at a banking conference in Washington.
--With assistance from Christopher Condon To contact the reporters on this story: Eliza Ronalds-Hannon in New York at eronaldshann@bloomberg.net, Andrea Wong in New York at awong268@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Michael Aneiro
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