Two-year notes may be among the Treasuries most at risk of a sell-off if employment data this week beats expectations. A $35 billion auction of two-year notes priced with a one basis point tail on Monday, though traders said this may have been due to investors cleaning books ahead of quarter end.
A bigger risk to yields will be if data on Friday show that employers added more than the currently expected 190,000 jobs to their payrolls in March. Two-year notes were last down 2/32 in price to yield 0.78 percent, up from 0.74 percent late on Friday. They could be at risk as the Federal Reserve unwinds its stimulus program and paves the way for higher rates.
One reason two-year notes may be vulnerable is that the number of investors holding long positions in short-term Treasuries has increased, and the need to cover these positions in any sell-off may exacerbate market moves, said J.P. Morgan. Futures data by the Commodity Futures Trading Commission indicates that long positions among "speculative" accounts, including hedge funds, are at four-month highs.
On each of the last seven occasions since 2009 that payrolls have surprised to the upside, three-year and five-year Treasuries yields, which had the most carry trades, rose by an average 10 basis points that day, J.P. Morgan said. A break above the notes' current yield support at around 0.86 percent to 0.90 percent could send yields swiftly to the 1.20 percent area, he said.
Five-year and seven-year notes also weakened ahead of planned auctions of the notes on Tuesday and Wednesday. Five-year notes were down 6/32 in price to yield 2.20 percent, up from 2.16 percent, and seven-year notes fell 6/32 in price to yield 2.86 percent, up from 2.84 percent. Benchmark 10-year notes dropped 4/32 in price to yield 3.46 percent, up from 3.44 percent.
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