Yields jump, curve flattens after strong jobs report

NEW YORK: US Treasury yields jumped on Friday and the yield curve flattened after a report showed that US job growth rose solidly in January and wages rebounded strongly, raising some bets that the Federal Reserve may act sooner to raise interest rates.

Nonfarm payrolls increased by 257,000 last month, the Labor Department said on Friday. Data for November and December was revised to show 147,000 more jobs created than previously reported.

Wages increased 12 cents last month after falling five cents in December. That took the year-on-year gain to 2.2 percent, the largest since August.

"By any measure, this was an extremely good report," said Tom Porcelli, chief US economist at RBC Capital Markets in New York. "It adds some additional evidence for those folks wondering what the fate of wages is going to be, that you probably are looking at some modest wage pressures here."

Short- and intermediate-dated debt took the brunt of the selling as some analysts and investors worried that current yields are underestimating the likelihood that the Fed may raise rates in the coming months.

"The market has not priced in an early Fed. The market is still priced for 50 percent chance in July. With this kind of a number, the Fed can go in the first half of the year. One more report like this and the Fed will be going earlier," said Richard Gilhooly, an interest rate strategist at TD Securities in New York.

Short and intermediate-dated notes are the most sensitive to interest rate increases.

Two-year note yields increased to 0.61 percent from 0.53 percent, the highest since Jan. 9, and five-year note

yields rose to 1.41 percent from 1.29 percent.

The yield curve between five-year notes and 30-year bonds was last 107 basis points, after briefly flattening to 102 basis points, from 112 basis points before the report.

Futures contracts tied to the Fed's main policy rate now show that traders see a 62 percent chance that the first Fed rate hike will come in September 2015, based on CME FedWatch, which tracks rate hike expectations using its Fed funds futures contracts. They put a 47 percent probability on the chance of a July rate hike.

Before the report, traders were betting the Fed would wait until October before raising rates.

Benchmark 10-year note yields jumped to 1.90 percent from 1.81 percent before the report, and 30-year bond yields increased to 2.48 percent from 2.41 percent.