Treasuries extended losses after U.S. employers added more jobs in April than forecast, boosting the outlook for growth and trimming demand for refuge.
U.S. 10-year notes yields reached a one-week high as the U.S. employment rate unexpectedly fell to 7.5 percent, a four- year low. Yields on benchmark notes had reached to the lowest levels this year this week as European Central Bank cut interest rates and the Federal Reserve said it may increase or reduce the size its purchases of government and mortgage debt as conditions warrant under its quantitative-easing stimulus strategy.
“This nonfarm payroll number establishes a floor under Treasury yields,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The Fed continues to have its foot on the accelerator. That will keep a lid on how high Treasury yields can go. At the same time, this was a pretty decent payroll number, so that’s likely to put a floor on how low yields can go.”
The benchmark 10-year note yield rose seven basis points, or 0.07 percentage point, to 1.70 percent as of 8:49 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent note due in February 2023 fell 22/32, or $6.88 per $1,000 face amount, to 102 22/32.
It touched 1.61 percent on May 1, the lowest level since Dec. 11.
Payrolls expanded by 165,000 workers last month following a revised 138,000 increase in March that was larger than first estimated, Labor Department figures showed today in Washington. The median forecast of 90 economists surveyed by Bloomberg projected a 140,000 gain. Revisions to the prior two months’ reports added a total of 114,000 jobs to the employment count in February and March.
The jobless rate dropped to the lowest level since December 2008 from 7.6 percent in March.
“It’s an improvement, but not a game changer,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “We’re going to continue to drift in this range.”
Policy makers at the central bank said May 1 that “fiscal policy is restraining economic growth.” The statement, by highlighting the option to boost purchases in response to data showing economic growth is slowing, struck a contrast with discussion of the timing of a reduction in the pace of buying at the Fed’s March meeting.
The economy had added an average of 179,000 people a month to nonfarm payrolls in 2011 and 2012, Labor Department data show. The jobless rate had stayed above 8 percent since February 2009 until it broke the trend in September.
Treasuries dropped on Dec. 7, pushing yields up four basis points to 1.62 percent, when the 146,000-job increase in payrolls in November beat a Bloomberg survey forecast of 85,000.
Treasuries rallied in April as economic data from job growth to retail sales to inflation showed the pace of growth faltering, with U.S. government debt returning 1.1 percent, the best monthly performance since July 2011, according to Bank of America Merrill Lynch indexes.
The U.S. central bank has been buying $85 billion of bonds each month since the start of the year, $45 billion in Treasuries and $40 billion of mortgage debt, in an effort to hold down borrowing costs and encourage economic growth. It has kept its benchmark interest-rate target for overnight lending between banks in a range of zero to 0.25 percent since 2008 to support the economy.
Treasury 10-year yields dropped on May 1 to the lowest level this year after an industry report showed U.S. companies added fewer workers than economists forecast. Data on April 26 showed the economy grew at a 2.5 percent annualized rate in the first quarter, below the 3 percent median forecast in a Bloomberg survey.
“There’s been a loss of momentum” in the U.S. economy, said Bill Bovingdon, chief investment officer in Sydney at Altius Asset Management, which oversees the equivalent of $513 million. “The rational response is for bond yields to fall.”
Central banks around the world are trying to reduce borrowing costs to support their economies.
The European Central Bank cut its benchmark interest rate by a quarter percentage point to a record low of 0.5 percent yesterday. The Bank of Japan is purchasing more than 7 trillion yen ($71.3 billion) of securities each month to spur growth.
Fed purchases have helped reduce volatility in the Treasury market. Bank of America Merrill Lynch’s MOVE Index measuring price swings declined to a record 49.04 basis points on May 1. The average for the past decade is 96.9 basis points.
The U.S. is scheduled to sell $32 billion of three-year notes on May 7, $24 billion of 10-year debt the following day and $16 billion of 30-year bonds on May 9.
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