The most dangerous time for the Treasury market this month will be when the U.S. issues employment data on Friday, if February and March are any guide.
Benchmark 10-year yields jumped 14 basis points on Feb. 6 and 13 basis points on March 6, when the last two reports fueled bets the economy was getting strong enough to withstand higher interest rates. With yields moving inversely to prices, those dates mark the steepest declines in the world’s biggest bond market during the past eight weeks.
There’s a chance of another selloff before traders head home in the shortened Good Friday session, according to Hiroki Shimazu at SMBC Nikko Securities Inc. in Tokyo. Wages, a barometer of inflation, will be key, he said.
“There are signs of a tightening in the labor market,” said Shimazu, SMBC Nikko’s Tokyo-based senior market economist. “A stronger increase in wages will trigger a rise in Treasury yields.”
The good news for bond bulls is that the jobs-driven routs don’t last, said Hideaki Kuriki, an investor at Sumitomo Mitsui Trust Asset Management in Tokyo.
“It’s a short-term reaction,” said Kuriki, who helps oversee the equivalent of $40.6 billion as a portfolio manager. “The jobs market is recovering but the inflation rate is still at a low level. Yields will stay low.”
Speculation is building, meanwhile, that Friday’s jobs numbers may fall short of economists’ expectations, particularly after Wednesday’s ADP Research Institute report showed a smaller-than-forecast increase in U.S. employment.
The Labor Department report due on Friday will show U.S. employers added 245,000 jobs in March, according to a Bloomberg survey of economists. Hourly earnings rose 0.2 percent, based on the responses. The figure advanced 0.1 percent in February and 0.5 percent in January, which was the most since 2008.
The benchmark U.S. 10-year note yield fell one basis point, or 0.01 percentage point, to 1.85 percent as of 7 a.m. in New York, according to Bloomberg Bond Trader data. The 2 percent note due in February 2025 rose 1/8, or $1.25 per $1,000 face amount, to 101 3/8.
Bond trading is scheduled to close Friday in Japan and the U.K. in observance of the holiday, according to the Securities Industry and Financial Markets Association. In the U.S., government securities will trade until noon in New York.
Treasuries will also close at 3 p.m. in Japan April 6 and stay shut in the U.K. for Easter Monday, before trading as usual in the U.S.
While employment has been the bright spot in the U.S. economy, inflation is slowing, helping push 10-year Treasury yields down a quarter percentage point in the first three months of the year. The Bloomberg U.S. Treasury Bond Index advanced 1.8 percent in the period.
Investors pay so much attention to jobs because improvement in the labor market has led Federal Reserve policy makers to say they’re planning to raise interest rates.
Fed Chair Janet Yellen along with central bank officials Jeffrey Lacker, Dennis Lockhart, Esther George and Loretta Mester have all spoken in favor of higher borrowing costs in the past week, with some supporting a move as soon as June. Charles Evans, president of the Fed Bank of Chicago, said in March he doesn’t see any reason to rush to raise rates.
A Morgan Stanley index shows the central bank will increase its benchmark, the target for overnight loans between banks, from near zero in about 7 1/2 months.
If the jobs figures “are much below what is expected, there will be a further rally, but I don’t think the Fed scenario will be challenged,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. “If they are much stronger than expected, then what could happen is some reassessment on the timing of the Fed.”