Treasuries posted the biggest weekly drop in three months as employment gains in May pushed U.S. payrolls past their pre-recession peak and the jobless rate held at an almost six-year low.
The U.S.’s AA+ credit rating was affirmed by Standard & Poor’s, which cited the resiliency and diversity of the economy, almost three years after downgrading the nation for the first time. Yields on government securities in the euro-area fell to record lows a day after the European Central Bank cut interest rates, sparking a global rush for bonds. Federal Reserve Chair Janet Yellen said May 7 labor-market conditions “are still far from satisfactory.”
“The overall economy from a job perspective is finally trending in a good way,” Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “From the Fed’s perspective, you’re starting to see very good job growth.”
Benchmark 10-year yields rose less than one basis point to 2.59 percent as of 5 p.m. in New York after earlier dropping five basis points, based on Bloomberg Bond Trader prices. The price of the 2.5 percent security due in May 2024 dropped 1/32, or 31 cents per $1,000 face value, to 99 7/32.
Yields on the securities climbed 11 basis points this week, the most since the five days ended March 7, and rose as high as 2.64 percent yesterday, the most since May 13.
Two-year note yields added two basis points to 0.40 percent, the highest level since May 13, gained three basis points this week for a second five-day gain.
New York-based S&P said today in a statement that there is a less than one-in-three probability that the U.S.’s credit ranking will change in the next two years. The outlook on the rating is stable.
Since the August 2011 downgrade from AAA, record budget deficits have shrunk, economic growth accelerated, the dollar rallied, stocks climbed to all-time highs and Treasuries strengthened their hold as the world’s preferred haven from turmoil. Still, S&P said a polarized policy-making environment and high general government debt and budget deficits constrain the ratings.
“After the rating of the U.S. came under pressure because of the debt ceiling and government shut down, we actually saw a better cost of funding for the government,” David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “We’re still the safe haven everybody seeks when there’s uncertainty in the world. I don’t think that’s changed.”
Two-year notes dropped as employers added 217,000 jobs last month, according to the Labor Department, after a revised 282,000 increase in April. That compared with the median forecast in a Bloomberg survey for a 215,000 employment increase. Estimates ranged from increases of 110,000 to 350,000. The unemployment rate was unchanged at 6.3 percent.
May marked the fourth-straight month payrolls have increased at least 200,000, the first time that’s happened since September 1999 to January 2000.
“We’ve seen continued growth within the labor market,” Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “The sub-components continue to improve, but not to an extent that’s enough to shake up the bond market.”
The participation rate, which indicates the share of working-age people in the labor force, held at 62.8 percent, matching the lowest since March 1978. Average hourly earnings rose 0.2 percent to $24.38 in May from $24.33 the prior month. They were up 2.1 percent over the past 12 months.
The increase in payrolls put total employment beyond the peak of 138.4 million reached one month after the start of the deepest recession since World War II. The number of employees on payrolls stood at almost 138.5 million last month, Labor Department data show.
“It’s taken an extremely long period of time to gain back all of those jobs, much longer than any other cycle,” said Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC. “It really drives home how painfully slow the process has been.”
Benchmark U.S. 10-year notes yielded as much as 1.24 percentage points more than 10-year German bunds, the most since July 1999, helping fuel demand for Treasuries on a relative-value basis. The extra yield 10-year notes offer over their Group of Seven peers touched 0.69 percentage points, the highest since April 2010.
Yields on Belgian, French, Irish, Italian and Spanish debt fell to all-time lows today after ECB President Mario Draghi yesterday cut the deposit rate to minus 0.1 percent and said the bank will introduce new “targeted” offerings of liquidity to banks to encourage them to lend money to the real economy. Officials will also start work on purchases of asset-backed securities, he said.
“What’s going on is just the follow-through from Draghi and the ECB comments,” Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, which oversees $347.5 billion of bonds. “There’s going to be further global liquidity, and that’s positive for lower rates.”
Futures prices put the likelihood the Fed will start raising borrowing costs by its June 2015 at 44 percent, up from 42 percent yesterday, based on trading on the CME Group Inc.’s exchange. The chances of a Fed increase are 60 percent by its July 2015 meeting.
The Fed said after meeting on April 30 that it will keep the benchmark interest rate at almost zero for a “considerable time” after its bond-buying program ends. It reduced monthly debt purchases to $45 billion, its fourth straight $10 billion cut, and said further reductions in “measured steps” are likely.
At that pace, the stimulus program intended to push down borrowing costs for companies and consumers would end in December.