Bond traders still see Fed on course to announce taper in 2021 after August jobs report

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Bond investors are looking past the disappointingly weak August monthly jobs report and focusing instead on silver linings that are likely to keep the Fed’s intention of announcing tapering of bond purchases this year intact.

Treasury yields rose across the board and the curve steepened, even after the Labor Department reported only 235,000 new jobs were created last month—well below economists’ estimates for a gain of 720,000.

Beneath the surprisingly low headline figure, though, were declines in the unemployment rate, to 5.2% from 5.4% in July, and broader measures of labor market slack — which both hit the lowest readings since March 2020, when the pandemic began in the U.S. The report was broadly seen as keeping the central bank on course to announcing a tapering of $120 billion in monthly bond purchases in 2021, even if a September announcement is still a matter for debate, strategists said.

“Analysts are emphasizing all the positives in August payroll gains of 235k,” Jim Vogel, an executive vice president at FHN Financial in Memphis, wrote in a note. “That’s fine, we suppose, but almost no one looked at the negatives in the big July numbers.” The bottom line, he says, is that the steepening Treasury curve reflects “selective interpretations” of this summer’s labor market.

The widely followed spread between 2- and 10-year Treasury yields TMUBMUSD10Y, 1.326% TMUBMUSD02Y, 0.208% steepened to 112 basis points, near the highest levels in about three weeks. Meanwhile, the long end led gains in nominal yields, with the 10-year climbing 3.6 basis points to 1.321% and the 30-year rate rising a similar amount to 1.939%. Those were the highest levels in about a week.

“Despite the weaker-than-expected data, I don’t think this changes much for the Fed and their plans for tapering and still think they can make an announcement to begin tapering later this month,” David Petrosinelli, a senior trader at InspereX, said in emailed comments. “Even though the topline number missed significantly, the overall economy is healthy and recovering steadily.”