US Treasuries rallied on Wednesday as stock market losses and the prior session's bond selloff, the largest in three weeks, drew buyers for safe-haven US government debt. Treasuries prices fell on Tuesday when minutes from the Federal Reserve's last meeting showed policymakers less eager to add more monetary stimulus as the US economy improves.
That sense of restraint was also evident in Europe on Wednesday as central bankers resisted German pressure to signal an exit from recent accommodation, but effected no new stimulus despite downside risks to the economic outlook. But jitters about a potential flare-up in the euro zone debt crisis after a weak Spanish debt auction made spreads widen between the debt of Spain and Italy and safe-haven German bunds, and also enhanced the bid for safe-haven Treasuries.
"Yesterday there was a knee-jerk reaction to the minutes, and now we are seeing a bit of a correction to the over-reaction," said Jim Kochan, chief fixed income strategist at Wells Fargo Funds Management in Menomonee Falls, Wisconsin, adding "equity markets are retreating and that provides a counter-bid to the Treasuries market."
With major Wall Street stock indexes down more than 0.75 percent, a safe-haven bid helped drive benchmark 10-year Treasury notes up 21/32, letting their yields ease to 2.23 percent from 2.31 percent on Tuesday. The 30-year Treasury bond rose 1-13/32, its yield easing to 3.38 percent from 3.44 percent on Tuesday. "The central banks didn't provide any help and the European story is looking a little bit worse, hence the selloff in stocks and the rally in bonds," said Rob Robis, head of fixed income macro strategies at ING Investment Management in Atlanta, Georgia.
The bond rally was also "just a little bit of a payback for yesterday's move down which was quite abrupt," he said. The market's next focus will be the US non-farm payrolls figures due on Friday, because investors want to see how the data could feed into the Fed's policy calculations.
"The employment figures are key to the Fed's next move," said Kathy Jones, vice president and fixed income strategist at Schwab Center for Financial Research in New York. "If job growth accelerates, then there is little reason to consider more quantitative easing." The median of forecasts from analysts polled by Reuters is for US employers to have added 203,000 jobs in March, down from 227,000 new jobs in February.
Jones said one issue the Fed is watching is whether warm weather means employment growth reported in recent months has been skewed to the upside by seasonal adjustments. The next few months' data could shed some light on that point, she said. Jones said going into Friday's employment report, traders would want to be positioned defensively and not have long positions in longer-term bonds due to concern about the impact of a stronger-than-expected report. But Robis said the performance of markets in riskier assets and, conversely, that of safe-haven US debt, was still closely tied to Fed monetary accommodation.
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