TREASURIES-US bonds rally as jobs data backs Fed rate cut

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 3 (Reuters) - U.S. Treasuries advanced on Wednesday, pushing their yields lower, after data showed job openings fell in July, reflecting a softening labor market that reinforced expectations of an interest rate cut by the Federal Reserve later this month.

Dovish comments from Fed Governor Christopher Waller and Atlanta Fed President Raphael Bostic added to the bullish tone in U.S. government bonds.

In afternoon trading, U.S. two-year yields, which are tied to interest rate policy, slid 4.1 basis points (bps) to 3.617% US2YT=RR. The benchmark 10-year yield was also down, falling 6 bps to 4.217% US10YT=RR.

The Bureau of Labor Statistics' Job Openings and Labor Turnover Survey, or JOLTS, showed that job openings, a measure of labor demand, fell to 7.181 million by the last day of July. Economists polled by Reuters had forecast 7.38 million unfilled jobs.

Hiring increased 41,000 to 5.308 million in July. Layoffs rose 12,000 to 1.808 million.

"Demand picked up really swiftly in the U.S. Treasury market right after the JOLTS data and that really changed the tone," said Chip Hughey, managing director of fixed income at Truist Advisory Services in Richmond, Virginia.

"The report does add to speculation that the Fed will be able to resume rate cuts this month. It also suggests that the labor market is not a meaningful source of inflation at this point."
U.S. 30-year bond yields sank 7.4 bps to 4.896% US30YT=RR, after earlier hitting 5% earlier in the session, the highest in about 1-1/2 months.

"There was decent buying once the 30-year hit 5% and we're going to continue to see buyers around that level," said Tom di Galoma, managing director of rates and trading at Mischler Financial in Park City, Utah.

Following the JOLTS report, the Treasury yield curve flattened, with the gap between two-year and 10-year yields narrowing to 59.5 bps US2US10=TWEB, compared with 62 bps late on Tuesday. Earlier on Wednesday, the curve hit 63.8 bps, its widest spread since April.

The curve showed a bull-flattening trend, referring to a scenario in which long-term interest rates are falling faster than those on the short end of the curve. That, for now, reflects a slight decline in inflation expectations and often precedes the Fed cutting interest rates.

U.S. rate futures now widely expect the Fed to lower rates this month, pricing in a 96% chance of a 25-bp cut at the end of the two-day policy meeting on September 17, according to the CME Group's FedWatch tool. That was at 92% late on Tuesday.

Traders have also priced in about 59 bps of easing this year, up from 56 bps on Tuesday.

Adding to the rise in easing odds were comments from Fed Governor Waller, who repeated his call on Wednesday for an interest-rate cut in September given the weakening in the labor market. He said the pace of the cuts will depend on what happens next in the economy.

Waller was one of two Fed governors who dissented in favor of a rate cut in July, the other being Michelle Bowman.

The Fed's Bostic was also slightly dovish on Wednesday. He said high inflation remains the U.S. central bank's main risk, though growing signs of a weaker labor market still likely warrant a single 25-bp cut this year.

The focus now shifts to Friday's nonfarm payrolls report, with a Reuters poll showing a forecast of 75,000 new jobs created last month, compared with 73,000 in July. The unemployment rate was seen to have ticked up to 4.3% from 4.2% in July.

"The market is waiting to see how strong or weak the payrolls data would be," said Mischler's di Galoma. "If it's weak, the curve can probably steepen some more. And there's a good chance that we will see the 30-year yield rise above 5% again."