* Weak jobs report shows nonfarm payrolls decreased by 92,000
* Fed rate cut expectations for June meeting grow
* 10-year and 2-year yields on pace for biggest weekly rise since April (Updates to afternoon US trading)
NEW YORK, March 6 (Reuters) – US Treasury yields were lower in volatile trading on Friday, after a weak payrolls report lifted views that the Federal Reserve may need to cut interest rates at a quicker pace but surging oil prices continued to fan inflation fears as the war in Iran widened.
The Labor Department said nonfarm payrolls decreased by 92,000 jobs last month, well short of the forecast of economists polled by Reuters that predicted jobs increasing by 59,000, after a downwardly revised 126,000 increase in January.
The yield on the benchmark US 10-year Treasury note declined 2.7 basis points to 4.119% after hitting a three-week high of 4.187%.
Yields have been rising sharply this week, as the war against Iran has caused a surge in oil prices and fanned fears of rising inflation, which could put the Fed and other central banks around the globe on hold in cutting interest rates.
US President Donald Trump demanded Iran’s “unconditional surrender” on Friday, a dramatic escalation of his demands a week into the war he launched alongside Israel, which could make it more difficult to negotiate a swift end to hostilities.
US crude shot up 11.85% to $90.61 a barrel and Brent surged to $92.55 per barrel, up 8.36% on the day and was on pace for its biggest weekly climb since the early days of the COVID-19 pandemic in the first quarter of 2020. US crude was up about 35% and poised for its biggest weekly jump since at least 1983.
“It’s this kind of unusual mix between what seems like a healthy economic backdrop, with this really weak labor market and then inflation pressure,” said Thomas Urano, co-chief investment officer at Sage Advisory in Austin.
“The Treasury market, it’s so confused and stuck at the moment between trying to decide what’s more important – oil-driven inflation risk or a slowing labor market that could drag down growth.”
Other data from the Commerce Department showed retail sales for January fell 0.2%, slightly better than expectations of a decrease of 0.3%.
The two-year US Treasury yield, which typically moves in step with interest rate expectations for the Fed, tumbled 6.1 basis points to 3.538% after climbing to 3.631%, its highest since November 20.
The yield on the 30-year bond shed 0.5 basis point to 4.748%.
The yield on the 10-year note is up about 16 basis points on the week, on track for its biggest weekly climb since early April, while the two-year yield has jumped more than 16 basis points, which would also mark its largest weekly increase since early April.
Expectations for a cut of at least 25 basis points from the Fed at its June meeting increased after the jobs report and were last pricing in a 48.2% chance of a cut, according to CME’s FedWatch Tool, up from the roughly 30% chance earlier this week. Markets have largely ruled out any policy move by the central bank at the March or April meetings for some time.
A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at a positive 57.9 basis points.
The fresh signs of a softening labor market coupled with concerns about oil-induced inflation have left Fed officials with a tough decision on whether to keep rates steady in an attempt to hold inflation in check or cut them in order to prop up a labor market that may be losing steam.
The breakeven rate on five-year US Treasury Inflation-Protected Securities (TIPS) was last at 2.608%, its highest in nearly a year, after closing at 2.557% on Thursday.
The 10-year TIPS breakeven rate was last at 2.327%, indicating the market sees inflation averaging about 2.3% a year for the next decade.
(Reporting by Chuck Mikolajczak; Editing by Chizu Nomiyama, Philippa Fletcher and Diane Craft)
