Treasury Yields Experience Largest Increase in Two Weeks Following Release of Labor Market Data

Treasuries Fall as Private-Sector Employment Growth Suggests Rate Hike Ahead

Treasuries declined on Wednesday after a gauge of private-sector employment growth reinforced expectations that the Federal Reserve will raise interest rates this year. The 10-year note's yield increased by more than four basis points, reaching 4.49% in late trading, marking its second daily increase and the largest since May 19. This trend is a departure from the Treasury market's recent benefits, which included declining oil prices in anticipation of a Middle East peace accord unlocking supply from the region.

The ADP Research gauge of private-sector job growth in May showed an increase of 122,000, which slightly exceeded economists' median estimate. This data release, coupled with stronger-than-estimated April job openings data and the upcoming US government's monthly employment report for May, has provided further signs of labor stabilization. However, Treasury options activity during US morning included a large buyer of puts targeting an increase in the 10-year yield to around 4.7% by the end of July.

The Institute for Supply Management's service-sector gauge for May, which included measures of prices paid by companies and employment in the sector that were lower than estimated, showed broad-based growth despite rising energy-related costs. This reinforces a market narrative centered on higher real rates rather than higher inflation expectations. The overall gauge topped the median estimate, briefly recouping some of the losses in Treasuries after the report's release.

Read also: Market Analysis: Key Stocks to Watch - Narayana Hrudayalaya, ABB India, Federal Bank, Premier Energies, Ather Energy and More

The surge in oil prices since the US attacked Iran in late February has caused inflation gauges to exceed the Fed's 2% target by a widening margin. As a result, employment data need to show weakness to restore the chances of interest-rate cuts this year. The combination of persistently high oil prices and labor-market resilience has traders wagering that the Fed's next move will be a hike. Swaps tied to policy-meeting dates carry rates that imply a more than 80% chance of a quarter-point hike by year-end, up from 60% last week, and an increase is considered certain by January 2027 vs March previously.

The inflation rate targeted by the Fed rose 3.8% year-on-year in April, the fastest pace since 2023. A separate gauge, the consumer price index, also rose 3.8% in April, and is estimated to show an increase of 4.2% in May data to be released next week. Cleveland Fed President Beth Hammack on Tuesday said the central bank may need to act soon to address elevated inflation. The next policy meeting is slated for June 16-17, and an external communications blackout preceding it begins June 6.