US Treasury debt prices tumbled on Friday, sending yields to three-week highs, as a surprisingly low number of US job losses in November fuelled economic recovery hope and sapped demand for safe-haven bonds. The government said the US economy lost 11,000 jobs last month, far fewer than the 130,000 analysts had expected, leading investors to dump bonds in favour of stocks and also to increase bets on the likelihood of Federal Reserve rate hikes.
Though hopeful news for those among the 10.0 percent of the work force who are still unemployed, the data is a huge threat to the historically expensive Treasury market. Bond yields have remained low on the view that the weak economy and poor jobs outlook will damp inflation and prevent the Federal Reserve from raising interest rates from near zero anytime soon, but that notion could now be at risk. The news sent yields to three-week highs on a broad range of bond maturities ranging from two to 30 years.
The 30-year long bond was down well over a point in price to yield 4.43 percent, the highest since November 12. The benchmark 10-year Treasury note fell a point in price, sending yields to a three-week high of 3.51 percent. Two-year notes, which are particularly sensitive to changing views on Fed policy, were also clobbered, suffering their worst sell-off since June. Two-year notes were last down 8/32, yielding 0.87 percent.
If investors maintain their new-and-improved view of the economy, it could also present difficulties for next week's $74 billion worth of bond auctions planned by the Treasury. Though some investors might welcome the lower bond prices, expectations of further economic improvement might make some reluctant to buy safe-haven Treasuries at the auctions.
Reflecting an increase in bets on future Fed monetary tightening, prices on interest rate futures also fell. The market now fully factors in a rise in the Fed's benchmark overnight interest rate by August next year, but was not quite pricing that in on Thursday. "For the back end, this will rekindle fears of inflation. If we're beginning to absorb slack in the labour market, we're running the risk of some acceleration in unit labor costs."
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