US Treasury price sinks

US Treasury debt prices sank on Friday after the government reported a much smaller-than-expected drop in May non-farm payrolls, which added to recent signs the economic decline may be slowing.
Selling pressure was strongest on the short end of the yield curve, with some rising expectations the Federal Reserve may move to boost the recommended rate for overnight lending between banks sooner rather than later, based on recent signs the economy could be recovering from the worst recession in decades.
The benchmark 10-year note was trading 31/32 lower in price for a yield of 3.83 percent, up from 3.71 percent late on Thursday. The yield reached as high as 3.90 percent after the release of the data, marking the loftiest level in more than six months. The two-year note, which is more sensitive to changes in Fed rate expectations, was trading 16/32 lower in price for a yield of 1.22 percent from 0.96 percent late on Thursday.
US short-term interest rate futures, which track market expectations on Fed rate policy, made their first meaningful move in months - pushing the possible timing of the first Fed rate hike to late 2009 from early 2010. The government on Friday said US employers cut 345,000 jobs last month, the fewest since September and far less than the 520,000 consensus forecast.
However, the Labor Department said the unemployment rate raced to 9.4 percent, the highest since a matching rate in July 1983, from 8.9 percent in April. March and April's job losses were also revised down to show smaller declines. "Treasuries are selling off like crazy. Taking a long-term perspective, the safe-haven bid for Treasuries is going to wane," William Larkin, portfolio manager at Cabot Money Management in Boston, said after release of the jobs data.
The 30-year bond briefly traded more than two points lower in price, then retraced its losses to trade 23/32 lower for a yield of 4.63 percent, from 4.58 percent late on Thursday. The Treasury yield curve, or the spread between the yield on 2-year notes and 10-year notes, expanded to as much as 281 basis points, marking its widest on record.
However, once the longer-dated bonds began to pare losses while the short end of the curve maintained selling pressure, the spread between two-year notes and 10-year notes settled back to about 261 basis points. Five-year Treasury notes were trading a full point lower in price for a yield of 2.80 percent, from 2.58 percent late on Thursday.