Jobs Report Looms Over Latest Yield Climb for U.S. Treasurys


Bond prices have slipped ahead of fresh Labor Department employment data due Friday morning, with investors awaiting signs of how the job market could shift the Federal Reserve’s plans to raise interest rates higher for longer to fight inflation.

Yields on U.S. Treasury bonds have shot up in recent sessions, propelled by tough talk from Fed Chairman

Jerome Powell

and fears that central bankers still have their work cut out for them as they try to tame rising prices.

Traders worry that strong August employment numbers on Friday could help cement a Fed rate increase to at least 3% this month, with more steep rises ahead through the end of 2022. The Fed’s target rate now stands at 2.25% to 2.5%.

The yield on the two-year Treasury note finished Thursday at 3.52%, up from 3.448% on Wednesday and at its highest level since the run-up to the global financial crisis in 2007. The 10-year yield rose even more, climbing to 3.264%, from 3.131% a day earlier.

Treasury yields, which rise when the bond’s price falls, largely reflect how traders expect the Fed to set interest rates over the bond’s life. Investors think of Treasurys as practically immune to the risk of missed payments, so their yields effectively set a floor on borrowing costs throughout the economy, from home mortgages to corporate lending and student loans.

Economists are expecting to learn Friday morning that the U.S. added 318,000 jobs last month, according to a Wall Street Journal survey. That would be a fall from 528,000 new positions in July, but is expected to be strong enough to keep the unemployment rate at a razor-thin 3.5%. 

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Even though investors are already expecting strong employment figures, a solid jobs report Friday could still send short-term government bond yields higher by reaffirming the Fed’s likely path toward more rate increases, said Kathy Jones, chief fixed-income strategist at Charles Schwab.

“I think that a lot of the strength is built in, but the two-year yield, because it tracks where the Fed is going to go, has the most potential to move up from here,” Ms. Jones said. Although rates have been rising, Schwab’s recent guidance to clients has been to consider adding more long-term debt to their portfolios, because prices already reflect a potential peak in interest rates, she added.

Many investors and economists think that controlling inflation will require a reduction in the pace of hiring, because rising wages help fuel strong economic demand, which in turn boosts prices. Speaking at a Fed conference in Jackson Hole, Wyo. last week, Mr. Powell said that inflation-fighting rate increases “will also bring some pain to households and businesses.”

As they await Friday’s job numbers and contemplate Mr. Powell’s signals from last week, traders have upped their bets on how aggressively the central bank will move over the next 12 months. In the near term, futures bets show that investors now think the chances of a steep three-quarter-point interest-rate increase are about three in four, up from about two in three before Mr. Powell spoke last week.

Traders have also shifted to betting rates will stay higher for longer. They now expect the Fed’s benchmark rate to reach almost 4% by next June, up from wagers a month ago for roughly 3% rates next summer.

Write to Matt Grossman at matt.grossman@wsj.com

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