Treasuries Fall as Unemployment Claims Drop Before Jobs Report

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Treasuries fell, with 10-year note yields rising from almost two-month lows, as an unexpected drop in weekly jobless benefit claims added to evidence the Federal Reserve will have scope to raise interest rates this year.

The drop in prices is the first in five days and comes before a report Friday forecast to show the U.S. added 245,000 jobs in March. The employment sector has been the brightest spot in the economic recovery as recent data has showed a slowdown in manufacturing, durable goods and the inflation outlook.

“Employment seems to be growing pretty consistently,” said Alan De Rose, head of Treasury trading at Oppenheimer & Co. Inc. in New York. “Job growth is great, but it’s not contributing to excessive growth and we still haven’t seen inflation pick up.”

The 10-year note yield rose five basis points, or 0.05 percentage point, to 1.91 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 2 percent benchmark note due in February 2025 declined 1/2, or $5 per $1,000 face amount, to 100 25/32. The yield touched 1.83 percent, the lowest level since Feb. 6.

Labor Market

Jobless claims dropped by 20,000 to 268,000 in the week ended March 28, the lowest since the period ended Jan. 24 and second-lowest in at least a year. The median forecast of economists surveyed by Bloomberg projected 286,000.

The March jobless rate is forecast to remain at 5.5 percent, the lowest level since May 2008. Fed policy makers will weigh the employment data as they seek to balance their mandate of assuring price stability while fostering economic conditions that support full employment.

“They are very far from a neutral monetary policy and yet the labor market is within a zone for what the Fed considers normal,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of the 22 primary dealers that are obligated to bid U.S. debt sales. Yet the lack of immediate inflation pressure suggests “the Fed has time” before it is forced to boost interest rates, he said.

Barclays is forecasting the Fed’s first rate increase since 2006 will happen in September.

Fed funds futures for December were 0.395 percent, indicating about an even chance that the central bank will raise rates by its meeting that month. Futures for the funds rate in December 2016 trade at 1.05 percent.

Fed Chair Janet Yellen said last week in a speech in San Francisco that “it is appropriate for monetary policy to remain accommodative for some time,” and that after an initial increase in rates this year, officials won’t follow “any predetermined course of tightening.”

Treasuries with maturities longer than 12 months have returned 2.2 percent this year, according to the Bloomberg U.S. Treasury Bond Index. That compared with the 2.7 percent annual gains during the past three years.

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