US yields rise as wage growth backs bets on March Fed hike

US Treasury yields rose to fresh highs after the employment report for December showed wage growth remained hot, fanning inflationary concerns and solidifying March as the likely starting point for the first rate hike by the Federal Reserve.

While the 199,000 new jobs fell short of the expected 450,000 jump, wages for the past 12 months expanded at 4.7 per cent, eclipsing an expected pace of 4.2 per cent. The unemployment rate declined to 3.9 per cent, below the forecast of 4.1 per cent.

The rapid wage growth underscored the case for a more aggressive tightening by the Fed and capped a disastrous weak in the bond market. The five-year note rose as much as 4.8 basis points to 1.52 per cent, its highest level since early 2020, while the 10-year note flirted with its 1.77 per cent peak from last March, before easing back slightly.

“This is an inflation story and the curve is responding by bear steepening,” said Subadra Rajappa, head of US rates strategy at Societe Generale. “The Fed likely ignores the headline miss in the context of the unemployment rate declining to 3.9 per cent and eye-popping wage increase of 0.6 per cent month-over-month.” 

The bond market has been hit hard by waves of selling during the first week of the new year, and short-dated benchmark yields have climbed to their highest levels since early 2020. The 10-year note yield has surged from 1.51 per cent, while the real or inflation-adjusted 10-year yield has risen rapidly from minus 1.10 per cent to minus 0.77 per cent. The moves reflect expectations for a more hawkish Fed policy stance that includes implementing rate hikes and shrinking its balance sheet sooner than previously expected by investors.