For Treasuries investors, Thursday is all about the Federal Reserve.
The Labor Department will say U.S. employers added more than 200,000 jobs for the 15th time in 16 months in June, economists predict, backing the case for higher interest rates as early as September. Those prospects pushed Treasuries to their worst performance since 2013 last quarter, and sent 10-year yields to the highest in a month versus German bunds. Treasuries fell, after declining on Wednesday amid optimism Greece is moving closer to a deal with creditors that would end months of tense negotiations.
“Payrolls is a welcome distraction from the market mover No. 1, which is Greece,” said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. “This should come as a reminder that once Greece is solved, there’s still the Fed. And there’s still not a whole lot priced in compared to how the data’s been coming out.”
Rieger expects the U.S. central bank to raise its benchmark rate from near zero in September.
The benchmark Treasury 10-year yield rose two basis points, or 0.02 percentage point, to 2.45 percent as of 7:34 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.125 percent note due May 2025 fell 6/32, or $1.88 per $1,000 face amount, to 97 6/32.
The Bloomberg U.S. Treasury Bond Index declined 1.96 percent in the second quarter, its first loss since the final three months of 2013, as a rebound in economic indicators from retail sales to real estate weighed on demand for the safest government securities. The yield premium 10-year Treasuries offer over equivalent bunds was 158 basis points, having reached 161 basis points on Wednesday, the most since June 1.
Jobs and manufacturing data released Wednesday beat analysts’ forecasts, backing speculation that the Fed will raise its benchmark rate from near zero for the first time since 2006 this year.
“If you look at the recent indications, like the jobs report yesterday, that does suggest we should see a decent pick-up in employment growth,” said Marius Daheim, a senior rates strategist at SEB AB in Frankfurt.
With Greece in the background and the potential for the jobs data to surprise markets, Daheim said he’s recommending his clients don’t “position aggressively” before the report. He predicts 10-year yields will rise to 2.7 percent by the end of September and 3 percent by the end of the year.
Thursday’s labor report will show employers added 233,000 jobs in June, while average hourly earnings rose 2.3 percent on an annual basis, matching the biggest increase since 2009, according to median estimates in a Bloomberg poll of economists.
SEB’s Daheim said the earnings component of the report is important because “that’s something that feeds into inflation,” which is one of the key considerations for Fed policy makers as they consider when to raise rates.
Market implied policy rates compiled by Bloomberg suggest U.S. borrowing costs will be on hold for the next three months and will rise by 25 basis points by year-end.
Treasuries dealing is scheduled to close worldwide on Friday for the U.S. Independence Day holiday.
Greek Prime Minister Alexis Tsipras and his creditors sparred before a July 5 referendum on whether to accept the austerity demanded as a condition of aid by the nation’s creditors. An opinion poll suggested more voters are inclined to vote “yes” on the proposal.
In June, Fed Chair Janet Yellen reiterated that U.S. monetary policy will be driven by economic data. She said if an agreement on Greece’s debt wasn’t reached “there would undoubtedly be spillovers to the United States” that would affect the Fed’s outlook as well.
“Greece is still there, but we should rightly focus on the U.S. for the next 24 hours,” said Su-Lin Ong, a senior economist at Royal Bank of Canada in Sydney. “Markets are underpriced in the U.S. for rate hikes this year, and that is causing some under-performance versus Europe.”