US Treasury Yields Jump on Red-Hot U.S. Jobs Data

Treasury yields surged again after fresh data signalled that the U.S. labour market remains piping hot, raising concerns that the Federal Reserve could push interest rates higher and for longer than expected. Private payrolls grew by 497,000 in June, well above the 267,000 seen a month earlier, and topped economists’ expectations of 228,000, unleashing a quandary that could spell trouble for bonds. Does a robust figure bode well for risk, as it may signal recession avoidance? Or does it herald further rate hikes that would increase the odds that the Fed can unnecessarily push the economy into recession?

At any rate, the current momentum hit the longer end of the yield curve particularly hard.

The U.S. 2-Year Treasury yield, which is usually sensitive to Fed policy changes, rose from 4.90% to 4.95% after reaching an apex of 5.11% Thursday, a level unseen since June 2007. By contrast, the 10-year Treasury yield surpassed the 4% threshold, at 4.07% (up 23 basis points over the week), evoking investor apprehension. This sends a worrying signal as the 10-year yield is a critical yardstick for gauging borrowing costs, including mortgage rates which typically follow its trajectory. As the yield climbs, it entails an augmented cost of borrowing for both consumers and businesses alike.

European bond markets also took a beating, with the yield on the German 10-year Bund climbing from 2.39% to 2.64% while the yield on the 10-year French OAT gained 26 basis points from 2.93% to 3.19%.

Investment grade corporate bond indexes plunged as Treasury yields jumped in anticipation of more Fed tightening ahead. The IBOXX € Liquid Corporates index slid 0.69% and the IBOXX iShares $ Investment Grade Corporate Bond Index fell 1.19%.

High-yield bonds edged down 0.21% in Europe (IBOXX € Liquid High Yield Index), while their US counterparts lost 0.66% (Markit iBoxx USD Liquid High Yield Capped Index).

Emerging debt denominated in local currencies dropped by 0.73%, though the dollar index showed signs of weakness, down 0.62% week-over-week.