U.S. Treasury bonds declined after May employment growth in the United States surpassed all economists' forecasts, leading traders to fully price in expectations for a Federal Reserve interest rate hike before the end of this year.
The sell-off on Friday drove yields higher across the Treasury curve. The yield on the two-year Treasury note, which is most sensitive to changes in Fed policy, rose 8 basis points to 4.12%. The 10-year yield increased by 6 basis points to 4.53%.
Traders have now fully priced in a 25-basis-point rate hike from the Fed by the end of December, assigning a roughly 60% probability that the first hike could come as soon as October. Prior to the jobs data release, market expectations had pointed to the Fed's next rate increase occurring in March of next year. The Fed's benchmark interest rate has been held steady in a range of 3.5% to 3.75% since last December.
John Briggs, Head of US Rates Strategy at Natixis North America, stated, "The jobs data today shows a degree of recent acceleration, giving the market a second reason to consider a hike, especially with the Strait of Hormuz remaining closed and inflation risks still present."
Data released Friday by the U.S. Bureau of Labor Statistics showed non-farm payrolls increased by 172,000 in May, with figures for the prior two months revised upward. This resulted in the strongest three-month pace of job growth in over two years.
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