US government bond prices fell sharply on Friday as a report showing a tight labour market forced some investors to lower their bets on the chances of a Federal Reserve interest rate cut by midyear.
Losses, however, were limited by persistent worries about the subprime mortgage lending sector, which took the edge off stocks, keeping Treasuries slightly attractive, traders said.
"A large amount of the rate cut has been priced out today and it would take more news to push those rate cut odds down more," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co in New York.
Benchmark 10-year notes traded down 18/32 in price for a yield of 4.60 percent, against 4.52 percent late on Thursday. Prices earlier dived to session troughs of 22/32.
Short-term interest rate futures showed a roughly 32 percent perceived chance the Fed would cut interest rates by June, down from 66 percent late on Thursday. US employers added 97,000 jobs in February's, close to a median forecast of 100,000 in a Reuters poll. It was the smallest gain in two years, but job growth in prior months was revised higher and the unemployment rate dropped.
"The real killer was that average hourly earnings rose by 0.4 percent, suggesting that wages are still growing and inflation is still hanging around," said Kevin Giddis, managing director of fixed income at Morgan Keegan & Co in Memphis, Tennessee.
"We must see this category fall back into the 0.1 to 0.2 (percent) area to reduce the fear of inflation. Until then, the downward price pressure on bond prices will continue to be with us," Giddis said. In addition to the near-consensus nonfarm payrolls report, government bonds were pressured by an unusually strong wave of corporate issuance's, analysts said.
"Some of the negative pressure today reflects some of the issuance that has gone on in the past few days. We have seen issuance very robust compared to normal levels," said Crescenzi. Corporate issuance's totalled more than $20 billion on Tuesday and Wednesday, far above the normal issuance of $2 billion a day, he said, adding that the unwinding of hedges when issuance's are priced often put upward pressure on Treasury prices. "But net supply is negative because there is only so much (money) to go around," said Crescenzi.
The market was little moved by speeches by various Fed speakers, including Vice Chairman Donald Kohn, who said the central bank should closely watch inflation expectations. Worries about subprime mortgage lenders, which triggered some flight-to-safety bids into government bonds and out of stocks and other riskier assets on Thursday, persisted on Friday. These were reflected by stocks giving up some early gains.
Two-year notes, which respond closely to expectations on Federal Reserve interest rate moves, fell 6/32 in price to yield 4.67 percent, compared with 4.57 percent on Thursday. Two-year yields recorded their biggest daily spike up since November. The inversion spread between the two-year and 10-year notes gapped out to 9 basis points, the widest in more than a week, according to Reuters data.
Last week, flight-to-safety flows out of riskier assets and into Treasuries powered the 10-year note to its strongest performance in six months and two-year notes had their strongest performance in 18 months. The Dow Jones industrial average unofficially ended up 01.3 percent at 12,276.32.
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