10-Year Treasury Yield Hits 4.87% After Strong Jobs Data

The 10-year Treasury yield rose to 4.87% and the dollar index gained 0.7% as strong October payrolls raised interest rate hike bets; gold fell nearly 1%.

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U.S. Treasury yields and the dollar rose sharply on Friday, Nov. 6, after a much stronger-than-expected October employment report revived bets on higher interest rates. The 10-year yield rose about 4 basis points to roughly 4.87%, and the dollar index gained about 0.7% to 102.22. Spot gold fell nearly 1% to about $4,050.95 an ounce.

Nonfarm payrolls increased by 165,000 jobs, more than double the 65,000 economists expected. The unemployment rate dipped to 4.1%. Average hourly earnings rose 0.4% on the month and 3.1% from a year earlier.

What Happened in Treasury Markets After the Jobs Report?

Treasuries sold off across the curve as traders cut the odds of a pause in the Federal Reserve's tightening cycle. The 10-year yield rose roughly 4 basis points to 4.87%. The 2-year yield, which is most sensitive to expected policy moves, rose about 6 basis points to 4.52%. The 30-year yield added about 2 basis points to 5.27%.

The move partly unwound a haven rally from the previous session. Because the front end rose more than the long end, the curve flattened slightly. That pattern usually signals that investors are repricing the near-term path of policy rather than long-run growth or inflation.

Why Did the Dollar Rise and Gold Fall?

The dollar rose because higher expected U.S. interest rates widen the yield gap with other major economies, which draws capital into dollar assets. The dollar index, which measures the currency against a basket of six major peers, gained about 0.7% to 102.22.

Gold fell because it pays no interest. When yields rise, the opportunity cost of holding bullion rises with them. A stronger dollar also makes gold, which is priced in dollars, more expensive for buyers using other currencies. Spot gold dropped $34.10, or 0.89%, to about $4,050.95 an ounce. Gold-backed funds such as the SPDR Gold Shares ETF (GLD) track that price.

How Does the Jobs Report Change the Fed Rate Outlook?

The report strengthens the case for another quarter-point hike at the central bank's December meeting. The Federal Reserve held its target range at 3.75% to 4.00% on Oct. 28. A 25 basis point increase would lift the fed rate to 4.00% to 4.25%.

Futures markets priced the probability of a December hike at roughly 70% to 77% after the data, up from about 67% a day earlier. Wage growth of 3.1% a year is moderate, but the 0.4% monthly gain and a falling unemployment rate point to a labor market that is not cooling as policymakers had hoped. Officials have described further tightening as an option if activity stays firm.

The headline surprise was large. Payrolls beat the consensus by 100,000 jobs, and the unemployment rate moved the wrong way for those expecting a softer economy. Rate-sensitive segments of the economy, including housing, small-business borrowing and consumer credit, face higher costs if yields hold at these levels. Borrowing costs tied to the benchmark rate, including the prime rate that banks use for loans and credit lines, would rise in step with any December increase.

How Did Equities React?

U.S. stocks rose despite the jump in yields. The S&P 500 gained about 0.65% in Friday morning trading, as investors read the payrolls figure as evidence of economic resilience rather than a threat to earnings. Funds that track the index, including the SPDR S&P 500 ETF Trust (SPY), benefited from the advance.

That reaction is conditional. Equities usually look through higher yields when they reflect stronger growth. The relationship weakens if the 10-year yield moves decisively above 5%, a level not seen on a sustained basis in recent years, because discount rates on future earnings then rise faster than profit expectations.

What Comes Next for Yields and the Dollar?

The next test is inflation data. A consumer price report that confirms firm price pressure would reinforce the hike case and could push the 10-year yield toward 5%. A softer reading would give the Fed room to hold rates steady and could reverse part of Friday's dollar and yield gains.

Three variables will shape the path through the December meeting:

• Inflation prints: Monthly consumer and producer price data will show whether wage gains are feeding into prices.
• Fed communication: Speeches from policymakers will show how much weight the committee gives to a single strong employment report.
• Treasury supply: Large auction sizes and heavy issuance can add upward pressure to long-dated yields independent of policy expectations.

For gold, the direction depends on real yields and the dollar. If both keep rising, pressure on bullion near $4,000 an ounce is likely to persist. A pause in the dollar's advance would ease it.

Outlook

October's payroll surge of 165,000 jobs shifted market pricing toward a December rate increase. The 10-year yield at about 4.87%, a dollar index near 102.22 and gold down nearly 1% reflect that repricing. Inflation data and Fed commentary over the coming weeks will determine whether the move extends or fades.