US government bonds tumble after hot jobs report

US government bonds tumbled and stocks slipped after employment data showed red-hot labour conditions, leading traders to boost their expectations for Federal Reserve interest rate increases.

Treasury yields shot higher after the closely watched US jobs report showed employers added 528,000 jobs in July, more than double the 250,000 expected by economists and up sharply from 398,000 in June.

The two-year Treasury yield, which is sensitive to monetary policy expectations, surged 0.21 percentage points to 3.25 per cent — a sharp jump for a market that typically moves in small increments. Longer-dated bonds came under more subdued pressure.

The S&P 500 equity index closed 0.2 per cent lower as traders weighed the prospect of further hawkish rate rises from the Fed. The tech-heavy Nasdaq Composite, the components of which are particularly sensitive to interest rates, fell 0.5 per cent. Both indices had recovered from declines of more than 1 per cent earlier in the day.

For the week, the S&P 500 gained 0.4 per cent, while the Nasdaq added 2.2 per cent. It is the first time since the start of April that both indices have strung together three consecutive weekly gains.

“The narrative is going to be that it’s come in way too hot, the Fed is right, and the markets were wrong,” said Jim Paulsen, chief investment strategist of The Leuthold Group. “I think it’s a muted response . . . on the stock and bond market relative to the emotion generated by the headline numbers.”

The strong jobs data, which also showed the unemployment rate returning to a half-century low, helped allay some concerns that the world’s biggest economy may be headed for a recession. It could also give the Fed impetus to continue with its rapid rate increases, after it pushed borrowing costs higher by 0.75 percentage points in June and July.

Trading in federal funds futures on Friday showed that markets expect the Fed’s main interest rate to peak at 3.64 per cent in March 2023, up from 3.46 per cent before the release of the jobs report. The federal funds rate currently stands at a range of 2.25-2.50 per cent.

Market participants had already begun boosting expectations for tighter monetary policy in the US after remarks earlier this week from several Fed officials.

San Francisco Fed president Mary Daly said the central bank was “nowhere near” done with its fight to cool inflation, which continues to run at 40-year highs. Chicago Fed president Charles Evans said he thought a 0.5 percentage point increase at the next policy meeting in September would be appropriate. However, he left the door open to a larger 0.75 percentage point rise, which he said “could also be okay”.

The jobs report served as “a reminder that you can’t just look at the GDP report to see whether the economy is in recession”, said Gargi Chaudhuri, head of iShares investment strategy Americas at BlackRock. “You have to look at a whole host of data, including from the labour market.”

The effect of the report on the Treasury market exacerbated the extent to which yields on two-year Treasuries exceed those on the 10-year note. This so-called inversion of the yield curve is typically regarded as an indicator of an impending economic contraction. Following the data, the spread between the yields was at its most inverted since August 2000.

The US dollar followed Treasury yields higher on Friday, with an index tracking the currency against half a dozen peers up 0.8 per cent. The pound dropped 0.7 per cent, the euro 0.6 per cent, and the Japanese yen 1.6 per cent.

In equities European stocks fell, with the regional Stoxx 600 closing down 0.8 per cent. Asian shares made gains, with Hong Kong’s Hang Seng index edging up 0.1 per cent.