The US Treasuries market approaches Friday's US employment report with the expectation payrolls shed fewer jobs in November than October. Yields have risen this week, unwinding a safety bid related to debt issues in Dubai that created fresh demand for US Treasuries and pushed yields down.
Thus, the market does not have a strong bias ahead of Friday's employment report, said Stone & McCarthy Research Associates analyst John Canavan in Princeton, New Jersey. Lower-than forecast layoffs would hurt Treasury prices. The market could rally if job losses are steeper than expected. "Expectations are in line with the mixed view of the employment picture we've gotten this week," said Canavan.
Various labour market data released this week have offered a conflicting picture of employment trends. Jobless claims fell in the week ended November 28, the Labour Department reported. But employment subindexes in the Institute for Supply Management's manufacturing and non-manufacturing indexes showed weakness.
-- Positioned for fewer job losses
Economists polled by Reuters gave a median estimate of 130,000 jobs lost in November, down from 190,000 in October. Stone & McCarthy's own forecast for non-farm payroll job losses is 75,000, below the consensus forecast. "But we're in line with consensus with an unemployment rate forecast of 10.2 percent," Canavan said.
If payrolls do show just 75,000 new job losses in November, that would be negative for Treasuries, but not dramatically so, since prices have fallen and yields have risen quite a bit since the Dubai-related flight-to-quality. "To get a sense of where we're positioned, you have to go back a week; when the Dubai World news broke there was a tremendous flight to quality that no doubt incorporated a significant amount of short covering," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.
A tremendous surge in the overseas market on Thanksgiving Day sent the two-year note yield down to about 60 basis points and the 10-year yield down to 3.15 percent, Sullivan said. Since then, yields have moved higher, "largely because the fallout from the Dubai World debt crisis appeared contained and reversed the flight-to-quality," he said.
Preparing for supply next week added to the upward pressure on yields, Sullivan said. While the "official" consensus forecast calls for November nonfarm job losses of 125,000 to 130,000, so-called "whisper" numbers assert job losses might be fewer somewhere between 25,000 and 50,000, Sullivan said.
Those below-consensus estimates are tied to a seasonal adjustment related to enormous nonfarm payroll job losses recorded in November 2008, analysts said. The adjustment could minimise the job loss count this November and give the report a stronger tone than the consensus forecast, they said. "November job losses of 25,000 to 50,000 would be negative for the Treasury market," Sullivan said.
On the other hand, if job losses turn out to be steeper than anticipated, Treasuries could rally. "The Treasury market has been on the defensive once it looked as if Dubai was contained," Sullivan said. In addition, cash has flowed back into global equities. "Thus, the Street could be net short for tomorrow's payrolls statistics," Sullivan said.
Since Thanksgiving last Thursday, the 10-year Treasury yield has climbed to 3.39 percent from 3.15 percent. A neutral non-farm payrolls number as far as the Treasury market is concerned would be job losses of 100,000 to 200,000, Sullivan said. "If job losses top 200,000, that would encourage some buying of Treasuries and short-covering," he said.
"If the 'whisper numbers' are correct and job losses turn out to be fewer than 100,000, you could see the 10-year note yield gravitate toward 3.50 percent, especially heading into supply next week." The US Treasury said it would sell $40 billion in three-year notes on December 8, $21 billion in reopened 10-year notes on December 9 and $13 billion in reopened 30-year bonds on December 10, all to settle December 15. The Treasury estimated $14.6 billion of coupon securities held by the public will mature on December, December 15.