By Kate Duguid
NEW YORK, Apr 2 (Reuters) – Shorter-term U.S. Treasury yields rose Friday morning, flattening the yield curve, after the Labor Department reported stronger job growth than expected in March.
* The strength of the employment data on Friday led some investors to believe that the Federal Reserve could be prompted to raise interest rates earlier than expected, increasing short-term yields and flattening the curve.
* While the Fed’s stated goal of full employment remains a long way off for now, Friday’s flatter curve suggests investors believe the positive data will push inflation far enough above the Fed’s comfort level.
* “The market is now confident that the Fed will do everything in its power to try to help the labor market. It is inflation that will spoil the soup,” said Patrick Leary, chief market strategist and chief operating officer at Incapital. .
* Higher interest rate expectations pushed two- and three-year yields to their highest level since late February and five-year yields to their highest in more than a year. Rising yields on short- and medium-term debt caused the yield curve to flatten out on the second day of the quarter, after a steep rise in the first quarter.
* In the first quarter, the spread between two and 10-year yields rose to the highest since July 2015 and the spread between five and 30-year yields climbed to its highest level since August 2014. On Friday, spread 2 / 10 fell 7 basis points and the spread 5/30 fell 4.2 basis points.
* Tom Graff, head of fixed income at Brown Advisory, believes the Fed’s target of maximum employment is still too far away for the central bank to raise rates, but explained that, for now, pricing in inflation expectations is still higher is difficult for investors.
* “Markets are already assuming that inflation will average well above the Fed’s target for a full five years. It is not reasonable to keep pushing inflation higher and higher ad infinitum. At some point, even under average inflation targets, the Fed reacts, “Graff said.
(Edited in Spanish by Rodrigo Charme)