(Bloomberg) -- Bond traders’ expectations for how high the Federal Reserve might need to push its benchmark rate received renewed impetus on Thursday as focus turns to the strength of the US labor market, pushing short-end Treasury yields to levels last seen in November.

Front-end securities led a charge higher in Treasury rates after a better-than-anticipated reading for a key private jobs gauge and lower-than-expected weekly jobless claim figures. Attention is now zeroing in on the official monthly jobs report due Friday. Comments by policy maker Esther George also provided support for yields, with the Kansas City Fed President saying that the central bank should hold rates above 5% well into 2024.

Swaps linked to individual Fed decisions jumped and now suggest a peak in the overnight effective rate above 5% in the middle of 2023. The current target range for the Fed is 4.25% to 4.5% and there are around 37 basis points of hikes priced in for the next gathering in February, meaning the market is divided between the possibilities of the next move being 25 or 50 basis points.

“Today’s labor market is too strong for the Fed’s liking, and that’s part of the reason they likely go to 5% - 5.25% and hold, and not pivot,” said Leo Grohowski, chief investment officer at BNY Mellon Wealth Management. “In the near term, we’re likely to see a more significant inversion as the Fed maintains its resolve and the economy shows more signs of weakness.”

The market continues to price in the idea that the Fed will need to cut rates in the latter half of 2023, but yields in that part of the curve nevertheless jumped by more than 10 basis points Thursday.

The benchmark two-year Treasury yield ended the session nearly 9 basis points higher at 4.44%, a level last seen in November, after selling pressure was spurred by block trades in futures. Futures volumes ran at 22% above 20-day average up to 3pm, with most activity seen in the two- and five-year note contracts.

Late in New York, policy sensitive yields had trimmed some of their earlier rise, and that move was helped in part after St. Louis Fed president James Bullard said the central bank’s median projection for where rates will end this year, at 5.1%, is in the territory of being restrictive enough to rein in inflation.

Meanwhile the 30-year yield reversed course by midday and was down 1 basis point at 3.79% late in the session. The rebound in the long end helped sustain a deeper yield curve inversion, a trade that reflects the bond market expecting tighter Fed policy will eventually spark a recession and rate cuts. The yield curve inversion deepened back to a level seen in mid-December around -0.73 percentage points as longer-end rates rose by less, with the 10-year benchmark up 3 basis points to 3.71%. 

Read more: Pioneering Yield-Curve Economist Sees US Able to Dodge Recession

The jump higher in yields, was accompanied by a stronger US currency, with the Bloomberg dollar index rising 0.6% to a two-week high, and weaker equities with the S&P 500 falling as much as 1.3% and holding the bulk of its losses late on Wall Street. 

Other Fed officials have also opined in recent days on the trajectory for policy. Neel Kashkari of the Minneapolis Fed said Wednesday that the US central bank has at least another percentage point of interest-rate increases to deliver in 2023, while the Atlanta Fed’s Raphael Bostic said Thursday that there is still “much work to do on inflation.” Wednesday also saw the release of minutes from the Fed’s December policy meeting that revealed “no officials” expected a reduction in policy rates this year. 

Private payrolls increased 235,000 last month, led by small- and medium-sized businesses, according to data from ADP Research Institute in collaboration with Stanford Digital Economy Lab. The figure exceeded all but one forecast in a Bloomberg survey of economists. The annual pace of pay increases was +7.3%, according to ADP. Additionally, applications for unemployment benefits fell last week to the lowest since late September, according to Labor Department data. 

The goal of officials has been to bring inflation down and “they’re doing a good job of it,” Debbie Cunningham, chief investment officer of global liquidity markets and senior portfolio manager at Federated Hermes, said on Bloomberg Television Thursday. “But it’s not done yet at this point and thinking the world goes back into negative rates or low single-digit interest rates isn’t part of the picture at this point.”

--With assistance from Tom Keene, Jonathan Ferro and Edward Bolingbroke.

(Updates for market close, adds Bullard commentary.)

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