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Bond Report: Treasury yields reach highest levels in more than a week after robust U.S. jobs data

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U.S. bond yields rose for a third straight session to their highest levels in more than a week on Friday, after a strong U.S. jobs report bolstered the view that the Federal Reserve will continue to raise interest rates aggressively to combat inflation.

What’s happening

The yield on the 2-year Treasury
TMUBMUSD02Y,
3.106%

rose 8 basis points to 3.119% from 3.039% as of late Thursday.

The yield on the 10-year Treasury
TMUBMUSD10Y,
3.077%

advanced 9.1 basis points to 3.098% versus 3.007% on Thursday afternoon.

The yield on the 30-year Treasury
TMUBMUSD30Y,
3.257%

rose 7.2 basis points to 3.267% from 3.195% in the prior session.

Those were the highest levels for the 2-, 10- and 30-year rates since June 28, based on 3 p.m. yields, according to Dow Jones Market Data.

For the four-day week, shortened by the Fourth of July holiday on Monday, the two-year yield was up by 27.6 basis points, the 10-year rate was higher by 19.7 basis points, and the 30-year yield was up by 14.1 basis points. It was the largest weekly gains for the 2- and 10-year rates since the period that ended June 10, and for the 30-year rate since May 6.

The 2-year to 10-year spread remained inverted, at minus 1.6 basis points, signaling a potential looming economic downturn.

What’s driving markets

Data released on Friday showed that the U.S. created a greater-than-expected 372,000 new jobs in June, confounding predictions of a big slowdown in hiring. Economists polled by The Wall Street Journal had forecast 250,000 new jobs.

The robust report pushed Treasury yields higher and left the yield curve inverted, as traders factored in the need for the Federal Reserve to keep raising borrowing costs in its campaign to suppress inflation.

Fed funds futures traders now see a 93% chance that policy makers will lift the fed funds rate by 75 basis points at their July 26-27 meeting, to between 2.25% and 2.5% from its current level of 1.5% to 1.75%. However, they’re also factoring in a 7% chance of an even bigger 100 basis point, or full percentage point, hike instead this month.

Read: Robust U.S. jobs data opens door to outside risk of full percentage point rate hike by Fed this month

See also: ‘Inflation is going to be stickier than most people imagine’: Inside the obscure market where traders have been mostly right about price gains.

Official data published on Thursday showed the number of Americans applying for unemployment benefits was 235,000. It was the highest level in six months.

Meanwhile, investors concerns have been swinging back and forth between worries about inflation and economic growth. As of Friday, the MOVE index, a gauge of expected Treasury market volatility, traded near 150, just shy of a multi-year high and up from a 52-week low of almost 52.

What analysts are saying?

“The stronger-than-consensus payroll print helped bear flatten the curve sharply, with 10y rates rising 8bp and the 5s30s curve flattening 4bp in the wake of the report. The market’s reaction is sensible since investors have pared back rate hike expectations in the past few weeks amid signs of an imminent recession,” TD Securities strategists Oscar Munoz, Priya Misra and others wrote in a note.

Though the market increased the odds of a July and a September rate hike after the jobs report, “we believe the market’s pricing for the terminal rate should continue to move closer to 4% as inflation remains a problem while the economy remains strong,” they said.

: There’s one industry in the June jobs report where wage growth beat inflation — but there’s a catch

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