The bond market liked the employment news. Yields are down.

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The labor force participation rate increased by 0.3 percentage points to 62.4%.

The time of dreams

If bond yields are any guide, the latest jobs data indicates that the Federal Reserve may be a bit less aggressive in raising interest rates later this month.

Yields on 10-year US Treasuries were down on Friday morning after news that the jobless rate had jumped to 3.7% in August from 3.5% the previous month. The 2-year Treasury yield, which more accurately reflects expectations for short-term interest rates, also fell. Rising yields may indicate that investors expect higher inflation and tighter monetary policy.

“If we consider this report could have pushed the Fed into another giant hike, it’s probably not there,” Strategas’ Don Rismiller said in a webinar Friday morning. “We still believe there is room for [the Fed] tighten, but at a slower pace – a 50 basis point rate hike rather than the giant 75 basis point hike.

The Federal Reserve’s rate-setting committee is due to meet on September 20-21.

By 11 a.m. Friday, the 10-year yield was at 3.2%, below the 3.26% it closed on Thursday. This means that investors had been pushing 10-year Treasuries higher as bond prices and yields move in opposite directions. Share prices rose, lifting the

S&P500

by 1.2%.

There was a feeling that, all things considered, the various labor market data points were somewhat encouraging, albeit varied.

Non-farm payrolls rose by 315,000 in August, in line with the 319,000 economists expected. A more encouraging sign is that the labor force participation rate rose by 0.3 percentage points to 62.4%, potentially helping to make the labor market a little less tight.

“Today’s data is at least going in the right direction,” said Yung-Yu Ma, chief investment strategist at BMO Wealth Management, adding that investors are very focused on the macro picture.

He adds that “the overall picture is a positive balance”, due in particular to the increase in the activity rate. “Absent that, it’s probably a neutral report at best because 300,000 jobs is still a big number in a month.”

The 10-year yield jumped to around 3.28% in previous trading on Friday, a move Strategas’ Tom Tzitzouris attributed to some early selling before the jobs data was no longer fully digested by the market.

He cited a slightly lower average hourly wage and the slight increase in labor participation as factors that triggered short hedging in 10- and 2-year Treasury bills, driving prices higher and yields lower.

Meanwhile, the 2-year Treasury note was at 3.41% on Friday morning, well below the 3.52% it closed on Thursday. Investors had pushed that rating to its highest yield in nearly 15 years — an indication that the Fed would continue its very aggressive tightening regime — but labor news changed its trajectory.

Write to Lawrence C. Strauss at [email protected]

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