Traders Pare Fed-Hike Bets After Jobs; Treasury Curve Steepens

(Bloomberg) — Traders in the US rates market pared their bets on the amount of policy tightening they expect from the Federal Reserve after data showed an uptick in the unemployment rate and the pace of wage growth remaining steady, although the drive toward higher borrowing costs remains very much intact.

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Treasury yields fell across the board, led by moves in shorter-dated securities, which steepened the curve. The three-year rate slid as much as 13 basis points to 3.41%.

The pullback follows a runup in expectations recently that’s been fueled by hawkish commentary from Federal Reserve officials and relatively upbeat economic data.

Traders trimmed the amount of rate-hike premium priced in for the upcoming decision on Sept. 21 by 4 basis points to 63 basis points, suggesting relatively even odds of either a 75-basis-point or a 50-basis-point increase at the gathering. The expected peak for the Fed target this cycle was also trimmed by around 10 basis points to 3.86%, based on contracts linked to meeting dates.

The Bloomberg dollar index extended its decline for the day, although it remains close to an all-time high, while US stocks rose.

Nonfarm payrolls increased 315,000 last month following a revised 526,000 advance in July, a Labor Department report showed Friday. The unemployment rate unexpectedly rose to 3.7% as the participation rate climbed. Year-on-year growth in average hourly earnings was at 5.2%, the same as the prior month and slightly below the median estimate of economists.

“It’s just one number so we wouldn’t want to go to far, but it’s consistent with where the Fed wants to go,” said former Fed Governor Randall Kroszner, now a University of Chicago Booth School of Business professor. “It has made markets somewhat happy as they were worried it could have been a blow out report here,” he told Bloomberg Television.

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(Updates prices.)

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