US yield curve steepens as wages increase, jobs growth disappoints

NEW YORK: Longer-dated US Treasury yields rose on Friday and the yield curve steepened after data showed wages increased more than expected in August even as jobs growth slowed. Average hourly earnings rose 0.6% in the month, more than the 0.3% economists expected.

Nonfarm payrolls missed expectations, however, with an increase of 235,000 jobs amid a softening in demand for services and persistent worker shortages as COVID-19 infections soared. Economists polled by Reuters had forecast nonfarm payrolls increasing by 728,000 jobs.

There is "more evidence of inflation that may not be as transitory as the Fed hopes it will be, or thinks it will be," said Zachary Griffiths, an interest rate strategist at Wells Fargo in Charlotte, North Carolina.

"You have the front-end responding to a Fed that's going to be on hold for perhaps longer, while they are going to have to contend with this inflation backdrop," he added.

Benchmark 10-year yields rose to 1.322%, from around 1.299% before the data was released. The yield curve between two-year and 10-year notes steepened to 111 basis points, from 108 basis points.

Federal Reserve Chair Jerome Powell said last week there was no rush to tighten monetary policy and gave a detailed account on why he regards a spike in inflation as temporary.

The Fed is expected to begin paring bond purchases this year, but is viewed as unlikely to announce a policy change until later this year.

"I don't think this changes tapering at all. If anything it supports Powell's more gradual approach," said David Petrosinelli, senior trader at InspereX in New York.

Two-month note yields rose to at least five-month highs of seven basis points on growing concerns that lawmakers will delay increasing the debt limit until the last minute.

The government's two-year debt ceiling suspension expired in July though the Treasury is expected to get by until October or later through extraordinary measures.

Yields on bills due in late October and early November have risen above yields on other maturities as traders speculate that any cash crunch would be most likely around this time if lawmakers fail to act.

The Treasury will sell $120 billion in new supply next week including $58 billion in three-year notes, $38 billion in 10-year notes and $24 billion in 30-year bonds.