US Treasuries and tech shares fall after strong jobs report

Wall Street technology stocks fell and the 10-year US Treasury yield hit its highest level since January 2020 after a strong US jobs report underscored expectations for the Federal Reserve’s first interest rate rise of the pandemic era.

The blue-chip S&P 500 share index fell 0.6 per cent while its information technology sub-index dropped 1.2 per cent, taking its loss for the week to more than 4 per cent. The technology-focused Nasdaq Composite fell 1 per cent.

The US 10-year yield, a benchmark that underpins borrowing costs and equity valuations worldwide, rose to 1.78 per cent, up 0.05 percentage points on the day, as bond prices fell.

The moves came after the labour department’s monthly nonfarm payrolls report showed the US unemployment rate dipped from 4.2 per cent in November to 3.9 per cent in December, lower than economists had forecast.

Average hourly earnings jumped 4.7 per cent on a year-on-year basis, from an upwardly revised 5.1 per cent the previous month. The rise in employment, at 199,000, widely missed expectations of roughly 400,000.

This further unsettled markets that had whipsawed since Wednesday when minutes of the Federal Reserve’s latest meeting revealed officials were considering a faster timetable for interest rate rises than investors had anticipated, to combat elevated US inflation.

“The labour market is very tight, said Tatjana Greil Castro, co-head of public markets at credit investor Muzinich. “Then you potentially have wage pressures, which means higher inflation, so markets then anticipate the Fed tightening financial conditions.”

“Away from the headline payroll number this is a very strong employment report,” said Jack McIntyre, fixed income portfolio manager at Brandywine Global.

“Clearly this is going to shift more dovish Fed officials towards the idea they have to raise rates,” he added.

Last year’s double-digit gains for global stocks had been fuelled by the Fed and other central banks pushing borrowing costs to record lows as they bought huge quantities of government bonds to shield financial markets from the economic shocks of coronavirus.

Technology shares and other growth companies, whose valuations are flattered by low interest rates that magnify the present value of future earnings streams, were among the best performers of 2021.

“Markets are ripe for a correction, or greater, at this point,” said Phillip Toews, chief executive of US asset manager Toews Corporation. “The combination of rising interest rates and inflated asset prices doesn’t usually end well.”

Treasuries, meanwhile, rose in price with the Fed having more than doubled the size of its balance sheet since early 2020 to almost $9tn with purchases of government debt and mortgage-backed securities.

Those gains went into reverse this week as bond markets began the year with a heavy selloff. Investors dumped bonds as they unwound bets placed in December that the rapid spread of the Omicron coronavirus variant might cause the Fed to wait longer before raising interest rates.

Minutes from the US central bank’s December meeting further unsettled bond markets this week by revealing that policymakers have begun to discuss the reduction of the size of its balance sheet.

In Europe, the regional Stoxx 600 share index fell 0.6 per cent. Germany’s 10-year Bund yield rose 0.03 percentage points to about minus 0.03 per cent and Italy’s equivalent bond yield rose about 0.05 percentage points to 1.32 per cent. The dollar index, which measures the US currency against six others, dropped by around 0.5 per cent.

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