US Treasuries ended lower on Friday as a stock market rally on job growth and improved manufacturing hurt demand for safe-haven US government debt. US stocks reached five-year highs after US employment data - including upward revisions to job growth in November and December - and a stronger-than-expected Institute for Supply Management manufacturing survey sent the Dow industrials to 14,000 for the first time since October 2007 and the S&P to its highest point since December of that year.
The strong manufacturing report had the opposite impact on bonds, which tend to do less well when stronger growth raises the possibility of higher inflation, which erodes the purchasing power of fixed-income instruments. "The ISM manufacturing report was very strong relative to expectations and US Treasuries sold off on it," said Eric Stein, vice president and portfolio manager at Boston-based Eaton Vance Investment Managers. The persistent rise in stocks, with major stock indexes each up more than 1 percent, demonstrated investors' increased tolerance for risk, hurting safe-haven US government debt.
Analysts said cash was coming off the sidelines and moving into equities. But they said demand for bonds would remain. For one thing, the slightly higher unemployment rate in January suggested the Federal Reserve would not back off from its latest round of quantitative easing.
"When the Fed sees 7.9 percent unemployment, it's not going to lift its foot from the accelerator, and with their $85 billion purchases a month of Treasuries and mortgages, the Fed is a huge influence on the bond market," said Daniel Heckman, senior fixed income strategist at US Bank Wealth Management in Minneapolis. "That will prevent any rapid increase in interest rates."
Five- and seven-year debt outperformed as investors anticipated more Fed purchases in these sectors. In December, the Fed announced a new bond-buying program that also shifted more of its purchases into intermediate Treasuries, helping to push those yields down at year-end. The March 2017 Eurodollar contract fell 3 basis points to 98.055. The benchmark 10-year Treasury note last traded down 13/32 in price, its yield rising to 2.04 percent from 1.99 percent on Thursday. Ten-year notes have been testing 2 percent all week, mainly on suggestions the euro zone debt crisis may be easing. The 30-year bond fell 1-2/32 in price, allowing its yield to rise to 3.23 percent from 3.17 percent late on Thursday.
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