Bonds ignore weak payrolls as tight labor keeps Fed taper alive

(Bloomberg) --The Treasury yield curve steepened in reaction to mixed September employment data as traders concluded that the Federal Reserve’s timeline for tapering asset purchases is probably intact.

While Treasury yields have been volatile since the data release, the 10- and 30-year rose to the highest levels since June, steepening the curve as shorter-maturity yields remained little changed. The spread from the 5-year to the 30-year reached 113.9 basis points, wider by 3.6 basis point on the day and near the high end of its range over the past month. Over the past two weeks, curve-steepening has accompanied gains for commodity prices and outperformance by inflation-protected bonds.

Offsetting the weak job-creation number were an upward revision to August payrolls, a bigger-than-expected drop in unemployment and a faster pace of wage growth -- metrics that support the argument that the Fed should respond to price pressures in the economy.

“Today’s employment series looks to meet the minimum threshold for Fed to move forward with tapering in November,” said David Gagnon, managing director in U.S. Treasury trading at Academy Securities, Inc. Declining unemployment, in particular for minority subgroups, which the central bank has called for, “should give Fed officials comfort that jobs are headed in the right direction.”

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Fed Chair Jerome Powell said last month the U.S. central bank could begin scaling back asset purchases in November and complete the process by mid-2022, after officials revealed a growing inclination to raise interest rates next year. However, he left the door open to waiting longer if needed.

Nonfarm payrolls increased 194,000 last month, the smallest advance this year, after an upwardly revised 366,000 gain in August, a Labor Department report showed Friday. The unemployment rate fell to 4.8%, partly reflecting a decline in the size of the labor force. Meantime, average hourly earnings jumped.

(Adds trader comment in the fourth paragraph.)

--With assistance from Elizabeth Stanton.

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