US Treasuries cower ahead of milestone jobs report

08 May, 2004

The US Treasury prices dipped on Thursday after a surprising drop in the number of Americans lining up to claim unemployment benefits last week stoked fears of a strong payrolls report for April.
The state of the labour market is viewed as a key factor in the Federal Reserve's deliberations on when to begin raising interest rates, so Friday's jobs report is expected to be a major milestone for the downtrodden bond market.
Bonds had been down further following the unexpectedly strong jobless claims figures, but then erased the bulk of early losses as traders feared placing any major bets ahead of the monthly payrolls data.
"People are very scared of the employment number tomorrow," said Andrew Brenner, head of fixed income at Investec US
Traders have noted that much of the market was already deeply short of Treasuries, having borrowed bonds ahead of Friday's jobs data to sell the debt in the expectation of price falls.
As of late Thursday afternoon, the benchmark 10-year note was trading 3/32 lower in price, raising its yield to 4.61 percent and matching a September closing high, from 4.59 percent late on Wednesday.
Yields have now climbed almost a full percentage point from their 3.65 percent lows of March as a string of upbeat economic data has forced the market to price in an ever greater risk of rate hikes from the Fed.
The five-year note was unchanged for a yield of 3.70 percent, while the 30-year bond eased 4/32, taking yields to 5.37 percent from 5.36 percent.
At the short end of the curve, yields on the two-year note climbed to 2.38 percent from 2.33 percent, having risen all the way from a 1.45 percent trough since March.
Although no less than six top Fed officials appeared on Thursday, including Chairman Alan Greenspan, most discussed banking.
Greenspan focused on globalisation and steered clear of comments on the timing of any move to boost rates, which might be just as well for bond bulls given the strength in the latest jobless numbers.
Initial jobless claims dived to 315,000 from a revised 340,000 the previous week. Analysts had looked for a dip to 335,000. Continued claims also fell, to 2.935 million from 3.004 million.
"All of the labour market indicators suggest strength on the hiring side," said Stephen Stanley, chief economist at RBS Greenwich Capital.
"I would lean heavily toward the upside of our point estimate of 180,000 for tomorrow's number. My gut feel is that the jobs gain will have a 2-handle (200,000 +)," he added.
Median forecasts in a Reuters survey were for payrolls to rise around 173,000 in April after an out-sized 308,000 gain in March.
Analysts generally expect that a number above 200,000 will raise the risk of the Fed hiking rates as soon as its June policy meeting, while anything under 100,000 would argue for waiting until at least August.
Meanwhile, the recent rise in yields has dragged mortgage rates sharply higher and crimped refinancing. As a result, holders of mortgage debt have seen the average duration of their portfolios jump, an event known as extension risk, and are being forced to sell longer-dated Treasuries in response. Since the mortgage market has grown to be much larger than the Treasury market, the resulting selling can be substantial.

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