U.S., European bond yields little changed ahead of key jobs data

US, European bond yields little changed ahead of key jobs data, Fed rate call

U.S. Treasury and European government bond yields were little changed Friday as investors awaited August U.S. employment data at 1230 GMT, a key input ahead of the Federal Reserve’s interest-rate decision on Sept. 16.

The 10-year Treasury yield edged down, while the 10-year German Bund yield was steady.

The data will be closely watched as it could push back market expectations of a rate hike or could reinforce the prospect of unchanged rates.

Against an uncertain backdrop, markets currently price in a roughly equal possibility of a rate hike versus unchanged rates this month, a big change from Wednesday when a probability of around 70% of a rate increase was priced in, LSEG data showed.

“The market is still undecided about what the Fed is going to decide at its meeting in two weeks’ time,” said Christoph Rieger, head of rates and credit research at Commerzbank. “Today’s U.S. payrolls could tip the scale for the September Fed meeting,” he said in a note.

The 10-year U.S. Treasury yield edged down 1.0 basis point to 4.752%, while the 10-year German Bund yield was steady at 3.351%, according to Tradeweb. The U.K. 10-year gilt yield was up 0.6 basis point at 5.158%.

Markets scaled back rate-hike forecasts after speeches from Fed policymakers.

On Thursday, Fed Gov. Christopher Waller said during a virtual event hosted by Reuters that he would support holding interest rates steady if August inflation data backed it up. Waller’s remarks came a day after New York Fed President John Williams indicated that data so far doesn’t warrant an increase in borrowing costs. These comments prompted a reversal in yields from multiyear highs hit during the first half of this week.

Waller is “probably the most important person to listen to after [Chairman Kevin] Warsh,” and his comments underpin the likelihood of unchanged rates at the September Fed meeting, Jefferies’ global economist Mohit Kumar said.

“Waller’s comments support our view that the Fed will not hike rates at least till the midterms,” he said in a note.

Still, investors remain cautious about the outlook for bonds after concerns about elevated energy prices due to the Middle East conflict, combined with worries about high debt levels and fiscal policies. In a move that highlights those concerns, the manager of Norway’s $2.4 trillion sovereign-wealth fund proposed slashing the weighting of government debt in its bond portfolio to 50% from 70%.

Analysts in The Wall Street Journal’s poll expect Friday’s data to show that 53,000 jobs were created in August, an anticipated improvement from a decline of 23,000 in July.

Investors were cautious because a weak reading could further reduce rate-hike prospects while a strong reading would increase them. Focus from there will switch to next week’s U.S. inflation figures.

The employment data will show whether the labor market remains in its “low hire, low fire” equilibrium, with slow hiring offset by limited layoffs and a declining labor force, keeping unemployment broadly stable, First Citizens Bank’s Phil Neuhart said in a note.

“A meaningful decline in payrolls or a shrinking labor force would be early signs that labor market stagnation is giving way to broader weakness,” the head of market and economic research said.

Write to Emese Bartha at emese.bartha@wsj.com