(Corrects headline to say yields rose strongly instead of rose cautiously)
By Kate Duguid
NEW YORK, Jan 4 (Reuters) - Treasury yields rose strongly on Friday after the U.S. employment report for December came in more robust than expected, reversing some of the effects of this week’s financial market fluctuations.
U.S. employers hired the most workers in 10 months in December while boosting wages, with an increase in nonfarm payrolls by 312,000 jobs versus an expected 177,000. The report stands in stark contrast with evidence the global economy is slowing: China this week posted data showing factory activity contracted for the first time in 19 months in December, and there is evidence of weak manufacturing across much of Europe and Asia.
While the blowout jobs report may quell some fears about the economy’s health, Treasury investors showed only cautious optimism.
“I don’t think this very strong report is the end-all for market pricing. Markets are still watching trade negotiations, shut-down negotiations, and to some extent the equity market itself,” said Gennadiy Goldberg, interest rates strategist at TD Securities in New York.
“I don’t think the move to higher yields will be a straight line from here.”
The yield on two-year notes, which reflects traders’ expectations of Federal Reserve interest rate hikes, was up 8 basis points to 2.47 percent. The move is notable as the two-year yield on Thursday dropped below 2.4 percent, reaching parity with the federal funds effective rate for the first time since 2008.
Thursday’s market move suggested investors believed the U.S. central bank was unlikely to be able to continue to tighten monetary policy as its forecast suggests, and would in fact have to begin easing rates in the next two years. The jump in the two-year yield back above the fed funds effective rate on Friday signals some letup in those fears.
Rates across maturities were up, with the biggest gains in the middle of the yield curve. The five-year note yield was up 10 basis points at 2.47 percent, just below the two-year yield. The spread between two- and five-year notes first inverted on Dec. 3 and has been hovering around zero since then.
The spread between two- and 10-year yields is the conventional measure of the yield curve, the inversion of which is a strong indicator of recession. Spreads along the curve, like that between two- and five-year yields, however, tend to invert before the two- and 10-year spread.
The benchmark 10-year government yield was last at 2.63 percent, up 9 basis points from Thursday’s close. (Reporting by Kate Duguid Editing by Chizu Nomiyama)