US Treasury debt prices fell on Thursday as unexpectedly strong growth in third-quarter US unit labour costs was seen delaying a Federal Reserve rate cut next year, giving investors an excuse to skim profits from a recent rally.
Analysts said the sell-off was inevitable given the strong gains in the past two days, which pushed the yield on the benchmark 10-year government bond to a near one-month low of 4.55 percent.
Caution ahead of Friday's nonfarm payrolls report for October, expected to show a strong number, was also adding to the negative tone, analysts said. "There was a natural bias to take profits anyway, so when you saw unit labour costs go up by such a great amount, that triggered selling," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
"The market's bias is to take profits ahead of Friday's payrolls data. It's natural given that we are up near the highs of the year," he said. Benchmark 10-year Treasury notes fell 8/32 in price on the day, pushing the yield up to 4.60 percent and extending a downward trend that started in European trade.
US third-quarter nonfarm unit labour costs rose 3.8 percent, beating economists' forecast for a 3.4 percent gain, a government report showed. The report also showed business productivity was unexpectedly flat in the same period, which could complicate the view of some investors that the Fed might cut rates next year after raising them 17 times in the two years through June.
"Employment cost inflation is a late-cycle phenomenon and it is likely to keep Fed policy on hold heading into the first part of next year," said Alan Gayle, managing director at Trusco Capital Management in Atlanta. "Wage inflation is the most difficult to contain."
Thirty-year notes fell 14/32 in price to yield 4.72 percent, compared with 4.69 percent late on Wednesday. With Friday's labour market report looming, investors largely ignored Dallas Federal Reserve Bank President Richard Fisher's reiteration that he was encouraged by recent readings on inflation, but price pressures were still to high for his liking.
"Some people tried to characterise his comments as both bearish and bullish. If I look at the price action, I cannot see anything," said Rupkey. Data showing that the number of US workers applying for jobless benefits rose by an unexpectedly large 18,000 last week to 327,000, elicited a muted response from the market.
Investors anticipating sluggish US growth and early rate cuts helped start Treasuries' recent rally, which has pulled 10-year yields down 25 basis points since late last month.
Dealers say there is little room for more gains without confirmation that the slowdown is spreading throughout the economy. "Anytime you see a rally, people starting looking over their shoulders. They are worried that the payrolls may come in higher," said T.J. Marta Fixed Income Strategist Royal Bank of Canada Capital Markets. Traders were betting on Thursday that US employers added about 99,500 jobs in October, according to the results of a derivatives auction.
The median forecast of economists polled by Reuters last week predicted an increase of 125,000 jobs in nonfarm payrolls in October following a gain of 51,000 in September.
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