Weekly Treasury Update
Dollar
Prices of US Treasuries fell on Friday, boosting benchmark yields to an 11-month high as data showed US job growth picked up more than expected in February while the unemployment rate slipped to a four-year low.
Nonfarm payrolls jumped by 236,000 jobs last month, the Labor Department said, substantially above economists’ expectations of a 160,000 gain. Prices for benchmark 10-year notes fell 17/32 to yield 2.06%, up from 1.9965% late on Thursday, and the highest yield since April.
“From a technical standpoint, if the 10-year yield closes above 2.06%, the high yield we reached in January, that would be a negative event that could push yields even higher,” said Tom DiGaloma, managing director at Navigate Advisors. “Over the near term, we’d be targeting 2.13% to 2.15%.”
In late trade, the 30-year bond was down 30/32, its yield rising to 3.257% from 3.2016 late on Thursday. Yields slipped from early session highs as investors delved deeper into the report. A continued slide in the number of people participating in the labour market was one shadow over the results.
“This leaves the three-month average rate of payroll growth at 191k, slightly below the 200k in the January report, which leads us to temper our view of labour market strength based on the February data alone,” said Michael Gapen of Barclays.
The US jobless rate, which fell to 7.7% in February, would actually be around 11.3% without the drop in labour force participation, said UniCredit economist Harm Bandholz in a research note. A little over half of the drop in labour force participation is due to demographics, Bandholz said, but the rest is due to direct damage to the US job market from the Great Recession.
The unemployment rate, while falling to 7.7% from 7.9%, remains far above the 6.5% the Federal Reserve wants to see, which means the Fed is unlikely to tighten rates anytime soon.
Analysts noted the Fed is looking for steady improvement over more than just one month of data. That likely means continued asset-buying by the US central bank. The Fed has been buying $85bn per month of mortgage-backed securities and Treasuries through the year.
Euro
Italian bond futures fell and German ones pared losses after credit rating agency Fitch downgraded Italy to BBB-plus from A-minus, citing political uncertainty.
German Bund futures climbed to 142.73 after the downgrade, from around 142.45 earlier, but remained some 10 ticks lower on the day. Italian BTP futures fell to a low of 108.48, down 73 ticks on the day.
Range for previous week: $1.2955–$1.3134
Range for this week: $1.2895–$1.3195
Sterling
British government bonds hit their lowest in nearly two weeks on Friday after surprisingly robust US jobs data added to sharp losses made in the previous session after the Bank of England held fire on quantitative easing. June gilt futures settled 43 ticks lower at 115.70, bringing losses since the start of the week to 184 ticks.
US Treasury prices tumbled to an 11-month low on Friday after data showed US payrolls surged by 236,000 last month, far above expectations.
Jamie Searle, gilts strategist at Citi, said it was significant that gilts had underperformed Bunds in the wake of the data, and were only just faring better than Treasuries.
Gilts have had a rollercoaster ride in the past fortnight, enjoying their best performance since November 2011 last week - when weak data and dovish BoE rhetoric fuelled a rush to bet on more QE - but handing back more than half of those gains this week. Gilts suffered their sharpest fall in three weeks on Thursday after Britain’s central bank shied away from restarting its gilt purchase programme, wrong-footing many who had expected more stimulus.
In the cash market 10-year yields ended 5 basis points higher at 2.06%. The spread over Bunds widened 1 basis point to 53 basis points.
Range for previous week: $1.4885–$1.5199
Range for this week: $1.4825–$1.5260
Yen
Japanese government bond futures jumped to a record on Friday and the 20-year yield plunged after a decent sale of 30-year bonds implied solid demand for superlong maturities and prompted a wave of short covering.
The 10-year futures contract rose 20 ticks to 145.32, after reaching an all-time record peak of 145.50 in the afternoon session. The 20-year yield tumbled as much as 11 basis points to 1.555%, moving back toward Tuesday’s low of 1.450%, its lowest since mid-2003.
At the Ministry of Finance’s offering of ¥700bn ($7.4bn) of 30-year bonds, some ¥400bn were said to have sold to unknown bidders, a fairly large amount which some market participants said suggested demand from banks and other accounts seeking bonds.
“Today’s 30-year auction was a good timing for accounts to buy bond at the fiscal year-end, so there was likely demand from domestic lifers, and also it could be coming from pension funds who had been changing their positions out of domestic equities and foreign bonds into Japanese bonds,” said Tomohisa Fujiki, interest rate strategist at BNP Paribas.
The coupon on the latest offering was 1.8%, the lowest since July 2003. Despite the low coupon, the bonds sold at a better-than-expected lowest price of 99.45.
The sale drew bids of 3.33 times the amount offered, down from the previous sale’s bid-to-cover ratio of 3.52 times, and the tail between the average and lowest accepted prices was 0.16, matching that at last month’s offering.
The 30-year bond yield dropped 5.5 basis points to 1.735%, moving back toward a 2-1/2-year low of 1.625% hit on Tuesday.
The 10-year yield slipped 2 basis points to 0.650%, even though Tokyo’s Nikkei share average jumped 2.6% to close at a 53-month high, even as investors awaited the key US payrolls report later in the day for signals on the strength of the US recovery.
“There was a correction to moves earlier this week, but the auction results suggested that there is still real demand, so some used it as a buying opportunity in post-auction trading,” said a fixed-income fund manager at a Japanese trust fund.
Those upbeat domestic factors included mounting expectations that the Bank of Japan will buy more longer-dated bonds under a new leadership from April.
Range for previous week: ¥92.89–¥96.54
Range for this week: ¥93.50–¥97.15