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U.S. government bonds pulled back sharply Friday as the latest employment report pointed to a solid labor market, potentially giving the Federal Reserve more room to raise interest rates.
The U.S. economy added 255,000 new jobs last month, compared with the forecast of 179,000 by economists polled by The Wall Street Journal. Average hourly earnings for private-sector workers rose by eight cents, or 0.3%, from the previous month.
The data came as good news for the U.S. economy, a week after a report showed disappointing gross domestic product growth in the first half of the year.
In late-afternoon trading, the yield on the benchmark 10-year Treasury note was 1.583%, compared with 1.502% just before the report was released and 1.503% Thursday.
The yield on the two-year Treasury note, which is highly sensitive to the Federal Reserve’s policy outlook, settled at 0.722%, compared with 0.647% Thursday.
Yields rise when bond prices fall.
”This is a report that shows the economy is entering the third quarter in very good shape with very solid momentum, and there’s no sign anywhere of softening labor market conditions,” said Anthony Karydakis, chief economic strategist at Miller Tabak. Among the only caveats are that unusually large payroll gains came from the public sector and that job growth will likely slow in future months as skilled workers become increasingly scarce, he added.
Fed-funds futures, which are used to place bets on central bank policy, showed Friday that investors and traders see an 18% likelihood of a rate increase at the Fed’s September meeting, compared with 12% before the jobs report, according to CME Group.
The odds of a rate increase by December climbed to 46% from 32% Thursday.
The July jobs report surprised everybody, as U.S. employers added 255,000 jobs, well above the projected 179,000. In this photo from earlier this year, workers construct a building in Boston.
Photo:
Associated Press
Higher interest rates tend to dilute the value of outstanding government bonds.
Treasury yields have risen from the record lows set in early July in the aftermath of the U.K.’s vote to leave the European Union. But they remain well below their levels from earlier in the year, reflecting continued economic uncertainty and accommodative central bank policies around the developed world.
Even after rising Friday, the yield on the 10-year note fell short of the highest level it reached last month, when it briefly topped 1.6%, according to Tradeweb. The yield was 2.273% at the end of 2015.
Government bond yields dropped Thursday after the Bank of England cut its benchmark interest rate and announced a more expansive stimulus program than many analysts had expected, including purchases of both government bonds and corporate bonds.
The Fed has signaled an interest in tightening, rather than loosening its monetary policy, but it has exercised caution, having not raised interest rates since December.
With recent data painting a mixed picture of the U.S. economy, investors are generally skeptical that the Fed will raise interest rates at its next policy meeting, which falls just seven weeks before the presidential election in November.
Still, many hope to gain greater insight into the Fed’s outlook when Fed Chairwoman Janet Yellen speaks at the central bank’s annual conference in Jackson Hole, Wyo., later this month.
Write to Sam Goldfarb at sam.goldfarb@wsj.com
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