US Treasury prices sagged on Friday with benchmark yields reaching their highest in 9-1/2 months after a government report showed job growth surged to its strongest in almost three years. The March payrolls data stoked concerns over inflation and whether the Federal Reserve would raise interest rates more aggressively than some had thought.
The creation of 162,000 jobs showed the labour market, a critical economic driver, had finally turned the corner since economic growth returned in the third quarter. The bond sell-off, albeit in thin-holiday volume, was exacerbated by traders making room for next week's $82 billion in longer-dated note supply and anxiety over a meeting of Fed Board of Governors on Monday.
The US bond market closed early at noon (1600 GMT) for Good Friday. The cash stock market was shut, while stock futures had a shortened session. The latest jobs report initially triggered a burst of bond buying because the payroll increase fell short of the consensus forecast of a 190,000 rise.
But the buying quickly vanished when traders turned their attention to the upward revisions of previous months and a rather strong increase in private hirings in March, which economists say is most critical in sustaining the current recovery.
Longer-dated Treasuries suffered the most with the benchmark 10-year yield climbing as high as 3.95 percent, an intraday peak not seen since June 11, 2009 when it hit 4.01 percent, according to Reuters data. The 30-year bond lost more than a point with its yield at 4.80 percent, the highest in more than 9 months and only 1 basis point below its session high.
Short-dated Treasuries fared somewhat better, as the jobs report was not strong enough to change expectations when the Fed will raise its policy rates. This resulted in an expansion of the yield gap between two-year and 10-year notes to 2.85 percent, the widest closing level since February 23. On the other hand, interest rates futures for 2011 and 2012 delivery fell sharply, implying traders bet that once the Fed begins to tighten policy, it will do so faster than they had thought.
The Treasuries market will likely face renewed selling next week on more debt supply, following disappointing reception to last week's auctions worth $118 billion. Next week's supply wave will kick off with $8 billion in 10-year Treasury Inflation Protected Securities on Monday. followed by $40 billion in three-year notes on Tuesday, $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday.
The Treasury is also slated to sell at least $83 billion in bills next week. The onslaught of Treasury supply to fund the burgeoning federal deficit has distorted key market relationships. The yield spread between 10-year Treasuries and 10-year interest rate swap agreements, a gauge of long-term corporate borrowing cost, inverted for the first time last week.
The inversion ended with the 10-year swap spread last quoted at 1.50 basis points over Treasuries. Meanwhile, most analysts downplayed the significance of the upcoming Fed board meeting since it is held every other Monday, but it stirred chatter of another increase in the discount rate, or the emergency rate it lends to banks. Back on February 18, the Fed surprised the market when it hiked the discount rate by a quarter point to 0.75 percent.