Bond Prices Make Late Jump Higher; Curve Flattened — 10-Year 2.661%

US Treasury prices jumped higher late Wednesday, cracking through to close at new session highs with the 10-year chasing behind and closing the gap with the leading long bond. The two- and five-year yield spreads closed on an inverted slope.

The market has a batch of data Thursday, but all numbers will be overshadowed by Friday’s December employment report. “Whisper number” guesstimates on the non-farm payrolls (NFP) had been edging lower, with chatter running near 160,000 versus 180,000 consensus.

CME Group fed fund futures were pricing in a 91% chance that the Federal Open Market Committee (FOMC) will be on hold on rates through the end of 2019. The market has priced the odds of an easing by the Dec. 2019 FOMC at 9.0%, with the probability they will be in position to hike at just 8.7%.

The 30-year yield settled on the 2.982% low versus a 3.010% session high and 3.021% close Monday. The 10-year yield went out at the 2.661% low from a 2.678% high and 2.691% close. The five-year yield settled at the 2.498% low versus a 2.515% high and 2.511% Monday. The two-year yield settled near 2.50% against a 2.488% low, 2.538% high and 2.498% close.

The curve trade continued it steep flattening with the two- and 10-year yield gap near 16.1 from 19.3 Monday while the five- and 30-year yield spread narrowed to near 48.7 from 51.

Fed fund futures were able to sneak higher with the odds of a 25 basis point rate hike by the March FOMC to near 5.1% from 0.0% earlier versus 5.2% Monday and 41.8% Nov. 30. The probability of another such move by the June FOMC were back to 0.5% from 0.3% against 0.6% Monday and 14.8% a month ago.

Analysts with Morgan Stanley (MS) expect the NFP to hit below consensus at 167,000, citing “softer employment growth in certain industries that have seen outsized gains recently.” Regarding the average hourly earnings (AHE), MS expects “a strong 0.4% month-over-month gain,” versus 0.3% consensus. The higher estimate is due to an “upside calendar bias this month given that the 15th of the month fell on a Saturday.” MS noted AHE rose 0.4% in December 2017 “and so the strong monthly gain we are expecting still holds the year-over-year at 3.1%.”

The final December Markit manufacturing PMI slipped to 53.8, the lowest since September 2017, versus the 53.9 expected and preliminary and 55.3 in November.

Thursday’s calendar offers the weekly Mortgage Bankers’ Association applications index at 7 am ET, the December ADP private payrolls read at 8:15 am, weekly jobless claims at 8:30 am, and the Institute for Supply Management manufacturing index at 10 am. December vehicle sales will be released throughout the session.

The November construction report had been scheduled for release but has been delayed due to the partial government shutdown.

At 11 am the Treasury release details on Monday’s three- and six-month bill auctions, Tuesday’s new three-year note sale, Wednesday’s reopened 10-year, and Thursday’s reopened 30-year bond offering. There will be $40 billion four-week and $30 billion eight-week bills auctioned at 11:30 am.