US Treasuries beat a retreat on Friday after stronger-than-expected November job growth pointed to a stable economy, causing investors to postpone the timing of a potential Federal Reserve interest-rate cut.
Growth in US nonfarm payrolls totalled 132,000 jobs in November, more than the 110,000 predicted by economists in a Reuters poll and an increase from a revised 79,000 in October.
In recent weeks, fixed-income markets had responded to weak economic reports by estimating the timing for a Fed rate cut as early as March, said Stuart Hoffman, chief economist at PNC Financial Services Group in Pittsburgh, Pennsylvania.
"Now they have backed off that expectation and pushed the timing for a Fed rate cut back to June," Hoffman said. "That's the flip-flop the markets have been doing. When weak reports come out, the market raises the odds for a rate cut coming sooner rather than later. And then you get a couple of strong reports and they push the timing ahead into the second quarter."
In late trade, the benchmark 10-year note was down 17/32, pushing its yield up to 4.56 percent as markets calculated that it was now less likely that the Fed would use its meeting next week to foreshadow lower rates next year. Before the government reported its November employment statistics, bond prices were too high, said Josh Stiles, senior bond strategist at IDEAglobal.
"The coupon market went into the data 65 to 75 basis points below the 5.25 percent federal funds rate, reflecting expectations for multiple rate easings next year," he said.
To sustain such strength, the market needs "a steady diet of weak economic news and low inflation news," Stiles said. The employment report released on Friday did not provide that reinforcement, analysts said. "Although far from strong, it did not endorse the extreme bullishness in bonds," Stiles said.
William Sullivan, chief economist at JVB Financial Group, said the November payrolls report contributed to "an important bank of data" justifying the Fed's view that the economy seems likely to expand at a moderate pace. "That makes the intermediate and long end of the Treasury market terribly expensive against cost-of-carry realities," he said.
A selling flurry near midday could have been linked to remarks by Treasury Secretary Henry Paulson, analysts said. In an interview on CNBC, Paulson said China needed more foreign-exchange rate flexibility, though he declined to specify how much the Chinese currency should appreciate.
A stronger Chinese currency has potentially negative implications for Treasury prices, Sullivan said. First, if the Chinese currency appreciates against the dollar, it could lead to some import price inflation. Bond investors fear inflation because it erodes the value of fixed-income investments. Second, a stronger Chinese currency could shrink China's trade surplus, which in turn would reduce the amount of dollars that China could "recycle" into US Treasuries.
Foreign buying has been "a big supporting influence" for Treasuries, Sullivan noted. Traders said the jobs data were unlikely to change radically the market view that the Fed would cut rates next year to support a weaker economy.
"Bond prices fell because the report does not advance the bullish case for bonds," said Pierre Ellis, senior economist at Decision Economics in New York. "The Fed will certainly be on hold at its policy meeting next week and they may not even change the gist of their policy statement."
Two-year notes were trading down 6/32 in price, pushing the yield up to 4.68 percent, while five-year paper was down 11/32, yielding 4.53 percent. The 30-year long bond was down 27/32 to yield 4.66 percent, versus 4.61 percent on Thursday.
Consistent with the mixed tone of recent data, a report from the University of Michigan showed a steeper decline in December consumer sentiment than markets had expected.
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