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U.S. Government Bonds Fall As Labor Data Prompts Fed Pause Bets

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12/07/2018 | 11:38am EST

By Daniel Kruger

U.S. government bond prices fell after Friday's jobs report showed wage growth and unemployment matching investors' expectations.

The yield on the benchmark 10-year Treasury note rose to 2.897%, according to Tradeweb, from 2.872% Thursday.

Yields, which rise when bond prices fall, climbed after the Labor Department said Friday that U.S. employers slowed their pace of hiring in November, adding 155,000 jobs -- below the 198,000 predicted by economists surveyed by The Wall Street Journal. Wage growth matched the highest rate in nearly a decade, raising concerns about inflation, which erodes the purchasing power of bonds' fixed payments.

Yield gains were also accompanied by a rise in crude oil, which surged after members of the Organization of the Petroleum Exporting Countries reached a tentative deal to curb production. Oil prices are another component of inflation data.

In the past month, yields have fallen as some Fed officials have appeared increasingly willing to reconsider the plan to raise interest rates at a gradual pace. The Fed's tone has changed at the same time as financial markets have become increasingly volatile, yet there have been few signs that officials are broadly revising their forecasts. Continued trade tensions between the U.S. and China have also contributed to the decline in yields, analysts said.

A report from The Wall Street Journal Thursday that Fed officials are considering whether to signal a new wait-and-see approach at their December meeting eased concerns about the pace of rate increases, helping stocks and yields pare steep declines. Stocks also retreated Friday.

"I don't think [the report] derails the Fed this month, but perhaps it opens the door to a more flexible approach going forward," said Dan Mulholland, senior bond trader at Crédit Agricole.

When Fed officials met in September, they raised rates for the third time this year and penciled in one additional increase this year. They also signaled their intention to raise rates three times in 2019. While investors widely expect them to boost rates at their meeting later this month, they are becoming increasingly skeptical that policy makers will be able to meet that forecast.

Fed funds futures, which investors use to bet on the path of monetary policy, showed early Friday a 5% probability that the central bank will raise interest rates three or more times next year. That is down from 31% a month ago.

Some investors said concerns that slowing growth overseas would weigh on the U.S. was also dragging on expectations for interest-rate policy.

"It probably indicates as much concern about the economy outside the U.S. as it does about the economy inside the U.S.," said John Vail, chief global strategist at Nikko Asset Management.

Write to Daniel Kruger at Daniel.Kruger@wsj.com

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