Four-year high on 30-year yield as case for Dec rate hike rises

NEW YORK: US Treasury yields rose on Wednesday, with the 30-year yield hitting a four-year high, after US private payrolls recorded their biggest increase in seven months in September, bolstering the case for the Federal Reserve to raise rates in December.

The 30-year yield rose 6.6 basis points to 3.283 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 also up 6.6 basis points to 3.127 percent as sustained labor market strength should continue to underpin economic growth.

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 ADP report was published ahead of the government's more comprehensive employment report for September 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 noted, however, that due to an erratic correlation between the ADP and the government's non-farm payrolls releases, the firm tends not to revise its payrolls forecast based on ADP data.

Despite the ADP report's poor record predicting the private-payrolls component of the government's employment report, last month's jump underscored robust labor market conditions that are likely to keep the Federal Reserve on track to raise interest rates again in December.

Stellar data on the US non-manufacturing sector from the Institute for Supply Management further supported the ADP data from earlier in the morning, and pushed yields across maturities higher.

In spite of that, labor strength wage growth has continued to be 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.

Wage growth is a key component in rising inflation, which the Fed manages through interest rate policy. Labor market strength, without wage growth, may force the central bank to reconsider its rate-hiking strategy.

Yields also rose on Wednesday morning after the selloff in Italian bonds, which began late Monday, abated. Italy's populist government will cut its budget deficit targets from 2020, Economy Minister Giovanni Tria said on Wednesday, relieving some pressure on the country's financial markets after investors boosted the benchmark Italian government bond to a 4-1/2 year high as they sought safety in other markets.