Bonds Fed-Spooked
Investors Boot Treasurys, Anticipating End to Stimulus
Treasury prices lost ground Friday for a fifth straight session as a key jobs report added to worries about inflation, boosting speculation that the Federal Reserve could start withdrawing its monetary stimulus for the economy earlier than many expected.
An unexpected drop in the unemployment rate in the January nonfarm payrolls report followed robust manufacturing, service and jobs data earlier in the week, reinforcing a view among some market participants that the economic recovery is gaining strength.
Bond yields, which move inversely to their prices, surged on the week—to the highest levels since the middle of last year—in all major government-bond markets as many investors demand higher compensation to fend off the risks of inflation that eats into bonds' fixed returns over time.
Worries about inflation have risen amid a surge in global energy and food prices, and many investors bet that central banks in the U.S., the euro zone and the U.K. may need to start withdrawing the liquidity that was pumped into the economy following the 2007-08 financial crisis, including a rise in key policy interest rates.
More selling in Treasurys is likely in coming week as the Treasury market braces for $72 billion of new bond supply. The benchmark 10-year note's yield broke out of the recent 3.25% to 3.5% range, a sign that traders said is galvanizing more investors to bet on further declines in bond prices.
"Treasury bond bears are in control, and every up trade is met with selling," said Michael Franzese, head of Treasury trading at Wunderlich Securities in New York.
By day's end, the benchmark 10-year Treasury note was 26/32 lower, or $8.13 per $1,000 invested, to push up the yield 3.647%. The two-year note was 3/32 lower to yield 0.752%. The 30-year bond was 1 2/32 lower to yield 4.732%.
The 10-year note's price fell 2 15/32 on the week, and the yield is the highest since May 2010.
Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG's private wealth management unit, expects the 10-year note's yield to rise to 4% by the end of March. But he argued that the yield will fall in the second half of the year as the rise in yields, along with surging energy prices, would hurt the economy.
The rise in the 10-year yield, a benchmark for consumer and corporate borrowings, is likely to push up mortgage rates, a blow to a still-struggling housing market. The yield is still relatively low from a historic perspective—it has been below 4% since April 2010.
The 30-year bond's yield rose to as high as 4.740%, the highest level since April.
The U.S economy added 36,000 jobs last month, much less than 136,000 consensus estimate of economists, with some market participants blaming snow storms for possibly distorting the real picture of employment. But the surprising decline in the jobless rate, to 9% from 9.4% in December, garnered more attention. That is because the Federal Reserve has cited the high level of unemployment as a main reason to continue to provide monetary stimulus to the economy.
The report added to speculation that signs of economic recovery could mean no further monetary stimulus after the Fed finishes its $600 billion Treasury-bond-buying program through June. The five-year and seven-year Treasurys, the Fed's favored target for purchases, were the biggest losers Friday.
More important, some bet that the Fed may start raising interest rates in the next 12 months to keep a lid on inflation. Interest-rate futures traders have now fully priced in a rate increase at the beginning of 2012, and the two-year Treasury yield, the most sensitive to changes in monetary policy outlook, rose to as high as 0.768%, the highest level since June.
"The unemployment rate is probably the most understood economic statistic. Hence, the decline in the jobless rate itself will help the U.S. economy … by boosting confidence in the recovery and promoting spending," said Tony Crescenzi, market strategist and portfolio manager at Pacific Investment Management Co. "The rise in Treasury yields reflects the preference for riskier assets amid a recovering economy."