Treasury bonds and related exchange traded funds retreated Friday after the unexpectedly strong labor market data added to rising interest rate fears.
On Friday, the iShares 7-10 Year Treasury Bond ETF (IEF) fell 0.7%, and the iShares 20+ Year Treasury Bond ETF (NasdaqGS: TLT) declined 1.3%.
Treasury yields rose after the Labor Department revealed that the economy added 372,000 jobs in June, compared to analysts’ expectations for a 250,000 increase, the Wall Street Journal reports. Bond prices and yields share an inverse relationship.
The unemployment rate was at 3.6%, or near the half-century low previously hit before the onset of the Covid-19 pandemic in Spring 2020.
“The surprise of this is how strong the labor market still is,” Tim Horan, co-chief investment officer of fixed income at Chilton Trust, told the WSJ. “That labor market equilibrium is still taking its effect here, and it affirms this muscular need that the Fed has and the prioritizing of fighting inflation versus unemployment.”
Consequently, analysts and investors argued that Friday’s strong jobs report would support the Federal Reserve’s tighter monetary policy outlook, with an expected interest rate hike by 0.75 percentage point at its meeting later this month.
Fed funds futures traders now project a 95% chance that the fed funds rate will increase by 75 basis points at their July 26-27 meeting, to between 2.25% and 2.5% from its current level of 1.5% to 1.75%, MarketWatch reports. They also anticipate a 29% likelihood of another 75 basis point hike in September as well.
“The June jobs report is stronger than expected when looking at the number of jobs added, serving as an antidote to fears about a lack of economic momentum,” according to Mark Hamrick, senior economic analyst at Bankrate.com. “The employment report does nothing to dissuade Federal Reserve officials from sticking to their interest rate raising plans, looking to send inflation down, and closer to their 2% target. The next key reading for the Fed is the Consumer Price Index due in the days ahead.”
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