U.S. Government Bonds Slide on Strong Jobs Report

By Dow Jones Business News, 

By Min Zeng

Investors sold Treasury bonds for a third straight session Thursday as the latest employment report brightened the outlook for economic growth and reduced demand for safe assets.

The selling sent the yield on the benchmark 10-year note to 2.694%, the highest level since May 2. The two-year note's yield touched the highest level since September 2013.

In recent trade, the benchmark 10-year note's price fell by 9/32 lower, yielding 2.661%, according to Tradeweb. The yield was 2.636% right before the report.

The two-year note was 1/32 lower, yielding 0.512%.

Bond yields rise when their prices fall. The U.S. bond market will be shut at 2 p.m. Thursday and remain closed Friday for the Independence Day holiday.

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 since the boom years of the late 1990s.

The unemployment rate fell to 6.1% vs 6.3% expected by economists.

"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."

Mr. Roth said he expects bond yields to rise further in coming months as the U.S. economy gains more traction. He predicts the 10-year note's yield will rise "close to 3%" by the end of the year.

The data raised some anxiety over whether the Federal Reserve may raise interest rates from near zero sooner than many investors expect. The odds of a rate increase at the Fed's June 2015 meeting were 59% 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.

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."

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 bigger selloff in Treasurys at this point with major central banks keeping rates low."

Many bond bears believe Treasury yields will rise in the second half of the year, driven by stronger growth and higher inflation. Goldman Sachs Group Inc and J.P. Morgan expect the 10-year note's yield to rise to 3% at the end of December.

Data this week have boosted optimism that the world's largest economy is picking up speed after a recent soft patch. The economy suffered a 2% contraction during the first three months in 2014 and economists have blamed harsh Winter weather for the pullback.

A report Wednesday showed the U.S. private sector added 281,000 new jobs last month, the fastest pace since late 2012, which sparked a selloff in bonds.

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

  (END) Dow Jones Newswires
  Copyright (c) 2014 Dow Jones & Company, Inc.

This article appears in: US Markets , Bonds , Economy

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