Yields hit decade highs as case for Dec rate hike mounts

NEW YORK: US Treasury yields rose on Wednesday, with maturities at the short end of the curve hitting decade highs, after US private payrolls in September recorded their biggest increase in seven months, bolstering the case for the Federal Reserve to raise rates in December.

The two-year note yield, which reflects market expectations of interest rate hikes, rose to 2.852 percent, its highest since June 2008. Yields on the three- and five-year notes rose to their highest since December 2007 and October 2008 respectively.

The 30-year yield rose more than 7 basis points to 3.289 percent, its highest since September 2014. Benchmark 10-year government yields, which reflect the market's view on the overall health of the economy, were up 6.8 basis points to 3.129 percent

Private payrolls rose by 230,000 jobs in September, the largest gain since February, the ADP National Employment Report showed, after an upwardly revised 168,000 increase in August. The government's more comprehensive employment report for September is due on Friday.

"Since today's data came in well above market expectations, this release is likely to inspire other forecasters to revise their forecasts higher," said Ward McCarthy, money market economist at Jefferies.

He said the ADP report does not always help predict government non-farm payrolls releases. Still, a robust labor market should keep the Federal Reserve on track to raise interest rates in December.

Strong US non-manufacturing data from the Institute for Supply Management further supported the ADP data, pushing yields higher.

While labor markets are strong, wage growth has been muted.

"There was quite the clamoring after the (August) wage numbers came in much firmer, but on a real basis, they're flat, and a lot of it is just catch up and lag... It was somewhat of an overreaction," said Greg Peters, senior portfolio manager at PGIM Fixed Income.

Labor market strength without wage growth may not result in much inflation pressure, which in turn could prompt the Fed to reconsider its rate-hiking strategy.