Treasurys Pull Back on Jobs; 10-Year Yield Hits 2-Month High

By Dow Jones Business News, 
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By Min Zeng

Treasury bonds pulled back Thursday, capping a losing week, as fresh signs of U.S. employment gaining traction drove investors out of the haven market.

The U.S. bond market was shut at 2 p.m. Thursday and will remain closed Friday for the Independence Day holiday.

At the end of the shortened session, the benchmark 10-year note's price fell by 3/32, yielding 2.641%, according to Tradeweb. Bond yields rise when their prices decline.

The 10-year yield rose to as high as 2.694%, the highest level since May 2. It increased by about 0.1 percentage point for the week.

The two-year note was 1/32 lower, yielding 0.508%, the highest since September 2013.

Yields on shorter-dated bonds are directly affected by changes from the Federal Reserve's official interest rates while yields on longer-dated bonds are swayed more by inflation that chips away investors' fixed returns over time.

The U.S. economy added 288,000 new nonfarm jobs last month, according to the Labor Department. Economists had expected 215,000. June marked the first five-month stretch of job creation in excess of 200,000 per month since the boom years of the late 1990s.

The release joined a number of upbeat statistics over the past week, boosting optimism that the world's largest economy is picking up speed after a 2.9% contraction during the first three months in 2014. Economists have blamed harsh Winter weather for the pullback.

"It was unbelievable," said Thomas Roth, executive director in the U.S. government bond trading group at Mitsubishi UFJ Securities (USA) Inc. in New York. "The employment report was strong on all fronts. If the economy continues to gain momentum the Fed may fall behind the curve and be forced to move quicker" in terms of raising interest rates.

Mr. Roth predicts the 10-year note's yield will rise "close to 3%" by the end of the year.

The odds of a rate increase at the Fed's June 2015 meeting were 57% Thursday, up from 51% a day earlier, according to data from CME Group, a derivative exchange based in the U.S. A month ago, the odds were 43%.

Michael Feroli, chief U.S. economist at J.P. Morgan Chase & Co., said Thursday he now expects the Fed to start raising rates during the third quarter of 2015, earlier than the fourth quarter of 2015 the bank had previously predicted. Goldman Sachs Group Inc. said in a report Thursday the jobs report skews the risk toward an earlier rate hike than the first quarter of 2016 it has predicted.

Some investors are not convinced the report is sufficient to change the Fed's rate outlook.

"The turning point will come when wage inflation accelerates," said Gary Pollack, who helps oversee $12 billion of assets as head of fixed-income trading in New York at Deutsche Bank AG's private wealth-management unit. "Until then I don't think they will be in a hurry to raise rates."

Thursday's employment report showed average hourly earnings rose by 0.2% for a second month, matching economists' forecasts. The average work week for all workers held at 34.5 hours.

Some buyers stepped in to take advantage of higher yields, which contained the pace of the selling.

U.S. bonds offer superior yields compared with their counterparts in Germany and Japan, one of the key factors sending bond yields lower this year. The 10-year note's yield traded at 3% at the start of 2014.

German bond yields have tumbled as the European Central Bank cut interest rates to record lows and pledged more stimulus to support the region's flagging economy. Thursday, ECB President Mario Draghi indicated the central bank has left the door open for more actions to keep rates low for longer.

The 10-year German government bond yielded 1.3% Thursday, half of the yield on the 10-year Treasury note. The yield premium of the Treasury note over its German counterpart is the highest since 1999, attracting investors seeking relative value.

"The U.S. economy is on a stronger footing, but one report is not enough to move the needle of the Fed," said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. "It is difficult to have [a] bigger selloff in Treasurys at this point with major central banks keeping rates low."

COUPON  ISSUE   PRICE      CHANGE   YIELD     CHANGE
1/2%    2-year 99 31/32    dn 1/32  0.508%     +2.0BP
7/8%    3-year 99 24/32    dn 3/32  0.956%     +3.3BP
1 5/8%  5-year 99 15/32    dn 4/32  1.737%     +2.5BP
2 1/8%  7-year 99 7/32     dn 4/32  2.247%     +2.0BP
2 1/2% 10-year 98 25/32    dn 3/32  2.641%     +1.3BP
3 3/8% 30-year 98 7/32     dn 2/32  3.471%     +0.3BP
2-10-Yr Yield Spread: +213.3BPS Vs +213.3BPS

Source: Tradeweb

Write to Min Zeng at min.zeng@wsj.com


  (END) Dow Jones Newswires
  07-03-141439ET
  Copyright (c) 2014 Dow Jones & Company, Inc.


This article appears in: US Markets , Bonds , Economy , Real Estate


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