Signs this week that the U.S. economic recovery is largely intact prevailed in the Treasury market.
Benchmark 10-year yields are set to finish higher than they were seven days ago. A Labor Department report on April 3 showed jobs growth that was weaker than analysts anticipated, prompting investors to push back the outlook for the timing of the first interest-rate increase by the Federal Reserve in almost a decade.
A $13 billion auction of 30-year debt on Thursday met the weakest demand in 11 months, sending yields on the bonds to a three-week high. Local demand slumped, pushing the amount bought by foreigners to more than half the securities allotted. A report the same day showed fewer Americans applied for unemployment benefits over the past four weeks than at any time in almost 15 years. Minutes of the latest Federal Open Market Committee policy meeting released April 8 showed some hawkish officials argued for monetary tightening as early as June.
“After the initial scare on Good Friday because of the weak nonfarm payrolls, we didn’t see a major deterioration in other data,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “The recovery continues, albeit at a somewhat slower pace and since we haven’t seen other data showing a further deterioration, that has been helpful” in pushing yields higher, he said.
The benchmark Treasury 10-year yield was little changed at 1.95 percent as of 7:09 a.m. New York time, according to Bloomberg Bond Trader data. The yield increased 11 basis points, or 0.11 percentage point, this week, the most in a month. The price of the 2 percent note due in February 2025 was 100 13/32.
On April 3, the 10-year yield slid seven basis points, the most since March 18, as data showed U.S. employers added the fewest workers in March since December 2013. Since then, other reports showed service industries grew last month at about the same pace as in February, while consumer confidence increased last week to an almost eight-year high.
Oil prices that headed for the longest stretch of weekly gains since February 2014 have raised speculation that inflation will quicken.
Demand for Treasuries also waned after Greece met its cash obligation to the International Monetary Fund, dimming the appeal of the U.S. debt as a haven, Rabobank’s Marey said. The cash-strapped country also secured an increase in European Central Bank emergency funding available to its lenders.
Ten-year yields will probably drop to 1.70 percent during the northern hemisphere summer and then climb back to 2 percent by Dec. 31 as the Fed starts to raise interest rates, Marey said. The median forecast of 69 economists’ and strategists’ predictions compiled by Bloomberg is for the yield to reach 2.5 percent in the fourth quarter.
“Oil prices may have bottomed and there is even risk for a reversal from the trend that began in October,” said Hiroki Shimazu, Tokyo-based senior market economist at SMBC Nikko Securities Inc. The drop in oil prices over the past six months will start to show a positive impact on the U.S. economy later in the year, especially in boosting consumption, he said.
Minutes of the March 17-18 Fed meeting showed views were split among central-bank officials over the timing of raising interest rates, with a minority arguing for tightening as early as June, even as policy makers cut their projections on interest rates, growth and inflation.
Indirect bidders, a class of investor including foreign central banks, took 51.3 percent of the 30-year bonds sold on Thursday, enticed by yields that higher than those on offer in the euro area. The yield on German 10-year bunds, the region’s benchmark sovereign securities, fell to a record 0.139 percent on Thursday.
Treasury 30-year bond yields fell one basis point to 2.59 percent on Friday, having climbed eight basis points in the previous two days.
Kokusai Asset Management Co., Japan’s second-biggest debt fund, is betting dollar gains will help Treasuries outperform the Asian nation’s bonds. The company, which manages the equivalent of $31 billion, will buy Treasuries with up to a five-year maturity and expects one Fed rate increase this year and more in 2016, Masataka Horii, a senior portfolio manager who helps oversee the fund, said in an April 6 interview.