US Treasury debt prices retreated on Wednesday after private reports suggested November job growth would top Wall Street estimates and hinted at some stabilisation in the closely-watched housing market.
ADP Employer Services said 158,000 private-sector jobs were added to nonfarm payrolls last month, well above forecasts for a gain of 110,000 in the Labour Department report, which includes government workers, due on Friday.
ADP has diverged from payrolls before, but the forecast of a possible surprise to the upside caught investors off guard. Benchmark 10-year Treasury notes slipped 9/32 for a yield of 4.48 percent, up from 4.45 percent Tuesday.
"Bond yields rose because traders were not convinced that they had the risk-reward balance right going into the key economic reports at the end of this week and, ultimately, for the policy statement from the Federal Reserve's meeting next week," said Chris Rupkey, vice president and senior financial economist at Bank of Tokyo/Mitsubishi.
Fed officials next meet on December 12 to discuss and calibrate monetary policy. "If the Fed is not going to change its balance of risks from an inflation bias back to neutral, then the market is way out ahead of itself," Rupkey said.
A powerful bond rally "has discounted everything but the kitchen sink, recession, and three rate cuts in 2007," Rupkey said. "At more than 75 basis points below the current federal funds rate of 5.25 percent, yields are expensive."
Against that backdrop, when the ADP employment report appeared to predict stronger November payroll job growth than that which was being whispered about on Wall Street, "players took some money off the table," Rupkey added.
A glimpse of the influential housing sector also looked rosier than has lately been the case. An industry trade group said that US mortgage applications jumped 8.1 percent last week, aided by a surge in home refinancing loans as interest rates sank to their lowest levels in more than a year.
When people refinance their mortgages at lower interest rates, this can free up cash and consumer spending that can stimulate economic activity. With bond yields still near their lows for the year, traders said the reports provided a catalyst for a modest amount of selling.
"The bond market rally in November was a bit too far too fast," said Joseph Di Censo, fixed-income strategist at Lehman Brothers. "This is just part of a giveback." Michael Moran, chief economist at Daiwa Securities America, said even though reports released on Wednesday - the ADP data and figures on mortgage applications - were "second-tier" data, people still watched them closely.
The data were positive for the economy and the better the news on economic growth, the less reason the Federal Reserve has to ease interest rates, Moran observed.
The ADP report suggested that "we'll have a good payroll report on Friday and the mortgage application figures showed stability and possibly a pickup in housing," he said. Five-year notes were down 8/32 to yield 4.45 percent, while the 30-year bond fell 10/32 for a yield of 4.60 percent.
Heavier selling in two-year debt put long-term rates further below their short-term counterparts, partly reversing the recent trend. The spread between two- and 10-year maturities shifted to -10 basis points from -8 on Tuesday.
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