NEW YORK: US Treasuries prices slipped slightly yesterday as investors continued to digest Friday’s better than expected jobs report, which sent yields surging to their highest levels in three weeks.
The US government bonds are expected to stay at the relatively higher yields as investors prepare for $72bn in new supply this week, with the recent sell-off also seen as likely helping demand as investors take advantage of the yield backup.
Friday’s jobs gains caught traders offside, as most were anticipating a gloomier jobs picture after other economic releases pointed towards more sluggish growth.
“There was a significant amount of buying and short covering and capitulation around month-end and prior to that number, with expectations having been lowered substantially going in,” said
Dan Mulholland, managing director in Treasuries trading at BNY Mellon in New York.
The positive jobs surprise, with employers adding 165,000 jobs in April and the jobless rate falling to 7.5 percent, the lowest since December 2008, left traders scrambling to cover long exposures and sent yields surging.
Benchmark 10-year Treasuries yielded 1.75 percent yesterday, up from 1.74 percent on Friday and up from 1.62 percent before the jobs data was released.
Thirty-year bonds yielded 2.97 percent yesterday, up from 2.96 percent late on Friday and up from 2.82 percent before the jobs report.
Despite Friday’s jobs gains, many economic analysts believe that economic growth is still too slow and investors have pared back expectations that the Federal Reserve may taper or end bond purchases this year as inflation also dips. That may hold yields down near historic lows for some time yet.
Data last week showed that the Fed’s preferred gauge of consumer prices, the personal consumption index, slowed to 1.0 percent in March from 1.3 percent in February, the smallest gain in three and a half years.
Market inflation expectations as measured by forward contracts that show where traders think five-year inflation will be in five-years time, also a closely watched indicator by the Fed, have also slipped. The contracts now show expectations of 2.77 percent, down from around three percent at the beginning of the year.
“It’s possible that the Fed starts to focus on inflation as a reason to extend QE, rather than unemployment,” said Carl Lantz, head of US interest rate strategy at Credit Suisse in New York.
The Federal Reserve said on Wednesday it may increase or decrease bond purchase from its current $85bn per month, depending on the strength of the economy and on inflation, though most see the Fed as more likely to continue purchases for longer.
Before the recent slowdown in data most economists had expected the Fed would taper buying this year, and end purchases at the end of the year.
The Fed bought $3.31bn in notes due 2020 to 2023 yesterday as part of this programme and will purchase between $1.25bn and $1.75bn in bonds due 3026 to 2043 today.
The relatively higher yields, meanwhile, are expected to help the Treasury sell $32bn in three-year notes on Tuesday, $24bn in 10-year notes on Wednesday and $16bn in 30-year bonds on Thursday.
“The higher yields will entice some buying,” said Lantz.
Reuters
