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Treasuries gain as U.S. wage growth trails forecast in June

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(Bloomberg) — Treasuries gained after a report showed the U.S. added fewer jobs than forecast and wages stagnated in June, fueling doubts about when the Federal Reserve will be able to raise interest rates.

Yields fell after the Labor Department reported that the U.S. economy added 223,000 jobs last month, compared with a forecast for 233,000 among economists surveyed by Bloomberg. Wages grew at a slower rate than anticipated. Traders have been eyeing income growth as a key indicator of when the Fed will deem the economy strong enough to raise rates for the first time since 2006.

“The Fed has the ammunition if they want to pull the trigger and tighten in September, and I think they want to, but the number this morning causes a little concern,” said Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “There don’t seem to be any wage pressures at this point. Obviously it impacts inflation.”

Schlanger said he likes short-term corporate debt, though he had recently added Treasuries approaching the end of the second quarter to boost liquidity.

The yield of the benchmark 10-year U.S. Treasury note fell 4 basis points, or 0.04 percentage point, to 2.38 percent at 9:05 a.m. New York time, according to Bloomberg bond trader data. It touched 2.46 percent before the jobs report.

The 2.125 percent note due in May 2025 gained 3/8, or $3.75 per $1,000 face amount, to 97 25/32.

Low Inflation

Fed funds futures show there’s a 27 percent chance the central bank will increase its benchmark rate from near zero in September, down from 35 percent Wednesday, and a 68 percent chance by December, down from 72 percent, according to data compiled by Bloomberg.

Average hourly earnings at private employers increased just 2 percent over the 12 months ended in June, following a 2.3 percent gain the prior month. They’ve posted a 2 percent gain on average since the current expansion began.

“Many people were looking for a pick-up in average hourly earnings and they didn’t get it,” said Thomas Di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York. “We’re seeing this lack of inflation generally.”

The increase in June payrolls followed smaller gains in the prior two months as U.S. job market reflected a more moderate pace of economic growth. The jobless rate fell to a seven-year low of 5.3 percent as more people left the labor force, the Labor Department report showed Thursday in Washington.

The data challenge the view that the U.S. labor market has rebounded after an unexpectedly weak March report that led to a sharp drop in Treasury yields. In May, the economy added more jobs than forecast and hourly earnings rose more than projected, causing bond yields to surge.

–With assistance from Alexandra Scaggs in New York.