Treasuries plunged after a government report showed the pace of U.S. job growth accelerated in October, bolstering speculation that the economy will be strong enough for the Federal Reserve to raise interest rates next month.
Yields on two-year Treasuries rose to the highest since May 2010 after the Labor Department said the nation gained 271,000 jobs last month, following an increase of 137,000 in September. The median forecast in a Bloomberg News survey of economists was for an addition of 185,000.
Policy makers will see one more set of labor statistics before they meet in December to decide whether to lift interest rates for the first time since 2006. Fed Chair Janet Yellen said this week that a move next month is a "live possibility" if economic data hold up.
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"At least in the near term everyone's going to be positioning for a December rate hike and perhaps another one in the first quarter," said Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston.
The yield on the benchmark 10-year Treasury rose 10 basis points, or 0.10 percentage point, to 2.33 percent at 3:12 p.m. in New York, according to Bloomberg Bond Trader data, the highest since July. The two-year note reached as high as 0.95 percent.
Traders see a 68 percent chance the Fed will boost interest rates from near zero at its December meeting, up from 56 percent before the release of the labor data Friday. The calculations are based on the assumption the effective fed funds rate will average 0.375 percent after the first increase, compared with the current range of zero to 0.25 percent.
The five-year Treasury yield advanced more than a measure of the bond market's expectation for the average rate of inflation during the next five years. The latter gauge rose today to 1.26 percent, up from 1 percent on Sept. 28, though still lower than its 1.44 percent average this year and the Fed's 2 percent inflation target.
The gap between five- and 30-year yields narrowed by two basis points, to 1.35 percentage points, after the jobs data, indicating the market believes the Fed won't lose control of longer-term yields in the event of higher rates. The difference has narrowed from 1.49 percentage points before the Fed's Oct. 27 meeting.
Strong Jobs Report Creates 'Halo Effect'
The gap between yields on Treasuries maturing in two and five years widened to 0.85 percentage point, the highest since Aug. 19, as speculation begins to build for a second Fed rate increase. The gap had been 0.74 percentage point on Oct. 27, the first day of the Fed's last meeting, when policy makers said they would assess the potential for higher interest rates at their "next meeting" Dec. 15-16.
"The market action skipped right past" speculation about a December increase and "went into, is the next rate hike in March, is it in January?" said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee.
The strong jobs report may also create a "halo effect," which may help mitigate any potential weakness in upcoming data releases, such as the Nov. 13 report showing retail sales for October, Vogel said. Should the data fail to meet expectations "people are going to say that's OK, we've got this great October number, and so retail sales numbers will surely pick up in November."
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