US Treasuries sag on job data view

08 Apr, 2006

US Treasury debt prices skidded lower on Thursday as investors that worried upcoming jobs data and a renewed spike in commodity prices might encourage the Federal Reserve to keep raising interest rates.
With Wall Street forecasters looking for another solid month of employment growth, bond traders feared such a result might convince the central bank that further monetary tightening is needed to contain inflation.
A rally in commodities that had taken gold and silver prices to their highest in over two decades was also partly to blame for the sell-off, sending just the sort of inflation signal that the bond market is loath to see.
"The market has traded very poorly," said Frank Hsu, director of global fixed income at Fimat. "Gold is trading above $600, which is indicative of the inflation outlook. Then there is fear about a strong jobs number tomorrow."
The threat of rising borrowing costs overseas also hit the market as dealers worried more restrictive lending conditions globally could endanger recent stability of financial markets.
Benchmark 10-year notes lost 12/32 for a yield of 4.90 percent, up from 4.85 percent on Wednesday and bordering on a key technical threshold.
Two-year notes, in contrast, were off just 1/32 and yielding 4.83 percent, generating a wider gap between short- and long-term yields. The spread between 10- and two-year yields grew to 6 basis points from 4 on Wednesday.
Bond dealers were becoming anxious that central banks could be falling behind the curve in warding off more pervasive price increases in the economy.
"This is the market's way of telling the world's central banks 'hurry up and get your tightening over with, and don't think you're anywhere near done,'" said Dominic Konstam, head of interest-rate strategy at Credit Suisse.
"People are more worried about potential inflation in the pipeline," he said.
Inflation is the sworn enemy of bond investors, since it eats away at the value of their fixed returns.
Even Friday's jobs report would be examined for its own inflationary implications. Dealers hope the data will help answer questions like how tight the labour market is and how likely wage gains are to begin accelerating.
Wall Street estimates suggest the economy added a net 190,000 jobs in March, below the 243,000 seen in February but still a respectable increase.
Analysts will also be looking at the unemployment rate, which is expected to stay at 4.8 percent.
Pre-payrolls anxiety aside, Treasuries had already kicked off the session on a softer note, taking their cue from selling in euro zone and Japanese government debt.
Comments from Chicago Fed President Michael Moskow were not helpful either, as he highlighted the risk that voracious Asian central bank interest in US government debt would one day begin to wane.
Five-year notes slipped 5/32 to yield 4.84 percent, while the 30-year bond fell 29/32 to yield 4.97 percent. When the selling was at its heaviest, 30-year yields hit 4.983 percent, their highest since December 2004.

Read Comments