US yields rise with inflation, Fed in focus

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NEW YORK — U.S. bond yields rose on Friday and the curve steepened even after data showed upward wage pressures eased somewhat as the labor market remained strong.

US job growth beat expectations in April, underscoring the strength of the economy’s fundamentals despite a contraction in gross domestic product in the first quarter.

Average hourly earnings rose 0.3% after rising 0.5% in March, bringing year-on-year wage growth to 5.5% from 5.6% in March.

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“The broad-based increase in payrolls is encouraging,” said Brian Jacobsen, senior investment strategist at Allspring Global Investments in Menomonee Falls, Wisconsin.

“Wages are rising less than inflation, so despite massively high job vacancies, there is no sign of a wage-price spiral.”

The Fed is trying to slow inflation by tightening monetary policy, which could push the economy into recession. Market volatility has increased as traders navigate this thin line.

The Federal Reserve this week raised its benchmark rate by 50 basis points, but said the next expected hikes would not be 75 basis points or more, in what was initially seen as a so-called dovish hike. The market’s reaction to inflationary pressures, however, shows that a 75 basis point hike is almost expected for the next Fed meeting.

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The rise in yields “is a continuation of the bearish momentum in Treasuries that has been with us for some time and the Fed meeting hasn’t really changed that,” said Priya Misra, global head of Treasury. rates strategy at TD Securities in New York. .

“The market is saying the Fed will be forced to raise rates a lot more because inflation is high.”

The yield on 10-year Treasury bills rose 6 basis points to 3.129%.

The two-year US Treasury yield, which generally moves in line with interest rate expectations, rose 0.3 basis points to 2.727%. The 2-year/10-year rate spread was 40.0 basis points.

It was the fifth straight week of rising 10-year yields, with the streak totaling an advance of nearly 75 basis points.

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Misra noted that the planned liquidation of the Fed’s balance sheet could put pressure on yields on the long end of the curve, as could worries about runaway inflation.

“It could be (quantitative tightening) that has this impact, or a realization that the inflation risk premium should be higher,” she said.

“Even if the Fed goes up, it’s not able to really control inflation, so I should be paid more in terms of the inflation risk premium.”

The 30-year Treasury bond yield rose 6.3 basis points to 3.224%.

The break-even rate on five-year U.S. Treasury inflation-protected securities (TIPS) was last at 3.236%, after closing at 3.23% on Thursday.

The 10-year TIPS break-even rate was last at 2.869%.

The US dollar 5-year inflation-linked swap, considered by some to be a better indicator of inflation expectations due to possible distortions caused by the Fed’s quantitative easing, last stood at 2.667%. (Reporting by Rodrigo Campos, additional reporting by Gertrude Chavez-Dreyfuss; Editing by Mark Heinrich and Andrea Ricci)

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