Treasuries Advance as Focus Shifts to Election After Jobs Report

(Bloomberg) -- Treasuries rose as traders shifted their focus to next week’s U.S. election, overshadowing a report showing steady job gains and accelerating wage growth in October that strengthened the Federal Reserve’s case to raise interest rates this year.

Benchmark 10-year note yields fell as investors sought haven assets before the Nov. 8 presidential election. Treasury two-year notes, the coupon maturity most sensitive to Fed policy expectations, underperformed after Labor Department data showed wages rose from a year earlier by the most since 2009.

The employment report "was on target, but it wasn’t overly strong,” said Timothy High, U.S. strategist at BNP Paribas SA in New York, one of 23 primary dealers that trade with the Fed. “Given that it’s out of the way, the focus is more towards the uncertainty next week, the election clearly. The uncertainty will bring in some buying.”

Global bond markets are coming off their worst month in two years amid investor concern that major central banks are preparing to gradually reduce unprecedented monetary stimulus. The Fed’s policy committee this week cited signs that inflation is accelerating as it said the case for higher borrowing costs had strengthened, even as it left its key rate target unchanged. Longer-dated U.S. debt is on track to gain this week as polls show the contest between Democrat Hillary Clinton and Republican Donald Trump has tightened.

Treasury 10-year note yields fell four basis points, or 0.04 percentage point, to 1.78 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.5 percent security due in August 2026 rose 10/32, or $3.13 per $1,000 face amount, to 97 17/32.

Jobs Report

A Labor Department report showed employers added 161,000 positions last month, versus a median forecast of 173,000 in a Bloomberg survey of economists. Revisions added a total of 44,000 jobs to payrolls in the previous two months. Average hourly earnings rose 2.8 percent year-over-year.

"This paves the way for a Fed hike in December barring an election surprise, which tightens financial conditions," said Priya Misra, head of global interest-rate strategy in New York at TD Securities (USA) LLC, a primary dealer.

Futures traders assigned about an 76 percent probability of tighter policy by December, up from a 69 percent chance seen a week ago. The probabilities are based on the assumption the effective fed funds rate will trade at the middle of the new range after the central bank’s next hike.

Regardless of when the Fed moves, this policy-tightening cycle is poised to be the slowest and shallowest in recent history, based on the market for overnight index swaps, which reflect expectations for the fed funds effective rate. The contracts imply the rate will rise to about 0.94 percent in three years from 0.41 percent now -- essentially just two hikes during the next 36 months.

To contact the reporter on this story: Yun Li in New York at yli934@bloomberg.net. To contact the editors responsible for this story: Boris Korby at bkorby1@bloomberg.net, Michael Aneiro