By Dow Jones Business News,
July 03, 2014, 11:23:00 AM EDT
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
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
"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
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 email@example.com
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