By: Michael MacKenzie

(Bloomberg)–Treasuries sold off sharply with front-end yields rising 15-basis points after data showed a blockbuster gain in US employment in January, while wage growth continued to
moderate.

The data flew in the pace of a pronounced slide in yields following Wednesday’s Federal Reserve meeting, even as the central bank said additional rate increases were likely. The US
labor market created 517,000 new jobs last month, exceeding a forecast gain of 188,000. Wage gains moderated to a 4.4% pace over the past year with the unemployment rate falling more than forecast to 3.4%.

The data “helps reconcile the divergence between market pricing and Fedspeak,” said Gregory Faranello, Head of US Rates Trading and Strategy for AmeriVet Securities.

The rise in short-term yields corresponded to a hawkish repricing of swap contracts indicating the anticipated path of Fed policy. The expected peak in June rose to nearly 5%, having
traded below 4.90% earlier this week. The December contract jumped as much as 18 basis points to 4.59%, trimming expectations for rate cuts after the peak.

The latest jobs data dented bullish bond-market sentiment that weaker economic conditions in the coming months will keep the Fed from delivering on the additional rate increases policy makers still anticipate. The 10-year yield rose nearly 12 basis points to 3.51%, and was little changed on the week after falling to 3.33% on Thursday.

“Numbers like this make it difficult to stay at the yield levels we have witnessed this week and it calls into question a two-year near 4% when the Fed is still raising rates,” said
Kevin Flanagan, head of fixed income strategy at Wisdom Tree Investments. “This report was solid across the board.” Attention will now turn to Fed chair Jerome Powell when he speaks next week and whether he pushes back harder on a bond market that is still pricing in rate cuts later this year, while benchmark Treasury yields still trade below the current policy
band of 4.5% to 4.75%.

“Powell told us that the jobs numbers will determine Fed decision making from here and if the labor market can manage to hold up, they won’t cut rates and it will add to the volatility in the market,” said Flanagan.