The worst jobs report in more than a year was a warning shot across the economy’s bow and not a direct hit, the Treasury market decided.
U.S. 10-year notes dropped the most in a month this week as a decline in jobless claims and a jump in oil prices renewed confidence in the resilience of the U.S. economy. Reports next week are forecast to show retail sales and core inflation rose last month, adding further evidence that the payrolls miss on April 3 was an outlier.
“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.”
The benchmark 10-year note yield ended the week at 1.95 percent, a rise of 11 basis points, or 0.11 percentage point, according to Bloomberg Bond Trader data. It’s the biggest increase in a month. The price of the 2 percent note due in February 2025 ended the week at 100 15/32.
Thirty-year bonds added nine basis points to 2.58 and touched 2.61 percent, the highest since March 18.
Oil prices rose for a fourth straight week, the longest stretch of gains since February 2014, with prices up 5.4 percent on the week to $51.80 a barrel in New York.
As oil has gained, inflation has picked up. The difference between yields on Treasury Inflation Protected Securities and 10-year Treasury nominal yields, an outlook for inflation expectations, rose to 1.82 percentage points from a 2015 low of 1.49 percentage points on Jan. 14. The Fed’s goal is 2 percent.
“The rise in the commodity complex during the week also helped lift longer-term Treasury yields,” said Tyler Tucci, a U.S. government-bond strategist at Royal Bank of Scotland Plc’s RBS Securities unit in Stamford, Connecticut. Next week’s economic reports “will be pretty paramount in how the market thinks about the world going forward.”
Retail sales are forecast to show an increase in March after an unexpected decline the previous month, while core inflation data will show prices rising 1.7 percent from a year earlier.
A report April 9 showed fewer Americans applied for unemployment benefits over the past four weeks than at any time in almost 15 years. That helped 10-year yields gain back most of the seven basis points they lost April 3, after data showed U.S. employers added the fewest workers in March since December 2013.
Traders also brought forward bets for the timing of the Fed’s first rate increase, with odds for a December move rising to 58 percent from 53 percent at the end of last week, according to futures trading.
Those looking for guidance from Fed policy makers were disappointed.
Minutes of the Federal Open Market Committee’s March 17-18 meeting, released April 8, showed officials were split. A minority argued for raising rates as early as June, while others pushed for later this year and a couple favored holding them near zero until 2016.
Fed speakers added to the muddle on Friday.
Bank of Richmond President Jeffrey Lacker said he continues to favor a first interest-rate increase in June, while Minneapolis Fed President Narayana Kocherlakota reiterated that it would be a “mistake” to raise rates in 2015.
Still, a change in investor sentiment was evident at a $13 billion auction of 30-year debt April 9, which met the weakest demand in 11 months, pushing yields on the bonds to a three-week high.
Speculators also boosted positions that gain from a decline in five-year notes futures to the most since May 2014, according to U.S. Commodity Futures Trading Commission data. Net-short positions as of April 8 totaled 101,550 compared with 29,298 the previous week.
“Yields are in a process of turning higher,” said Steve Hochberg, Gainesville, Georgia-based chief market strategist at Elliott Wave International Inc., which follows technical patterns and trends to predict future price and yield levels. “It’s a sloppy process with a lot of cross-currents, but it is eventually going to lead to a pretty good run higher in yields.”