Two-year yield hits 10-year high after wage gains buttress rate hike

NEW YORK: The yield on the two-year U.S. Treasury note hit a 10-year high on Monday, holding gains made on Friday after the largest annual rise in wages since 2009 raised expectations of higher inflation and increased prospects of a September interest-rate hike.

The Labor Department on Friday reported that average hourly earnings increased 0.4 percent, or 10 cents in August. That raised the annual increase in wages to 2.9 percent in August, the largest gain since June 2009.

The two-year yield, which reflects market expectations of Federal Reserve interest-rate hikes, was up about half a basis point on Monday to a top of 2.715 percent, its highest since July 2008.

Wage growth in the United States has remained stubbornly low, but last month's increase fit in with economists' expectations that inflation will continue to bounce around the Fed's 2 percent target.

Interest rate futures traders are fully pricing in a third rate increase at the September meeting, according to the CME Group's FedWatch Tool. The odds of an additional hike in December, which would be the fourth this year, were at 72 percent on Monday, up from 69 percent the day before the jobs data release.

Yields on Monday were otherwise roughly unchanged from Friday, with the 10-year yield down slightly at 2.935 percent from Friday's high of 2.950 percent, its highest since Aug. 9. The 30-year yield was down to 3.092 percent, after also hitting its highest on Friday since Aug. 9 at 3.110 percent.

When asked what was driving yields on Monday, Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee said: "Not much really since Friday ... There's just a full slate of Treasury auctions and important news this week that people have to protect themselves against. So there's no reason for people to say 'Oh look higher yields, let's pile in today'."

The market will be watching auctions this week, with $23 billion in 10-year notes sold on Wednesday, and $15 billion of 30-year notes sold on Thursday. New supply of Treasuries has increased drastically in 2018 as the Fed has reduced their bond buying and the Treasury has issued new debt in order to pay for President Donald Trump's $1.5 trillion tax cut.

"Once we get past the 10-year auction and 30-year auction on Wednesday and Thursday, the market will get a better feel of where there's real demand for 10s and 30s and to see if that flattens the curve any," said Vogel.

The market will also be focused on the European Central Bank meeting on Thursday, as it moves away from unprecedented quantitative easing and towards quantitative tightening.