Bond Traders Shift Focus to Employment Data as Treasuries Fall

  • Private report shows March U.S. job gains exceeded forecasts
  • U.S. sells $28 billion of 7-year notes in week's final auction

Treasuries fell, led by 30-year bonds, as traders look to U.S. employment data for the next clue to the Federal Reserve’s interest-rate path.

Longer-dated U.S. debt retraced gains a day after Fed Chair Janet Yellen sent yields tumbling when she said in a speech that caution in raising rates was “especially warranted.” A report from the ADP Research Institute showed the U.S. added more jobs than forecast in March ahead of Labor Department data due April 1. The difference between yields on two- and 30-year Treasuries, known as the yield curve, climbed to the highest since Feb. 18.

The ADP report ”may have caused some traders to back away from bets that payrolls will disappoint on Friday,” said Jim O’Sullivan,  chief U.S. economist at High Frequency Economics Ltd in Valhalla, New York. ”It adds to the evidence that the trend in employment growth remains strong, despite the global economic and financial developments that Fed officials continue to worry about.”

Investors are assessing the outlook for the $13.3 trillion Treasuries market after Yellen said global economic risks may slow the pace of policy tightening even amid signs of U.S. economic strength. The Labor Department report will show the U.S. added 205,000 jobs this month while the pace of wage gains held steady at a 2.2 percent annual rate, according to a Bloomberg survey of economists. A report this week showed core U.S. inflation remains below the central bank’s 2 percent target.

Yield Curve

The yield on the 30-year bond, which is more sensitive to longer-term expectations for inflation and economic growth, rose five basis points, or 0.05 percentage point, to 2.65 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data.The 2.5 percent security due in February 2046 fell 1 3/32, or $10.94 per $1,000 face amount, to 96 27/32.

The gap between yields on two- and 30-year Treasuries steepened for a second day, rising to 1.89 percentage points.

“With the Fed now more reluctant to hike than previous perception suggested, the notion that inflation could bounce back and steepen up the curve makes sense,” said Ian Lyngen a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Companies added 200,000 workers in March, according to figures released Wednesday from Roseland, New Jersey-based ADP. The median forecast in a Bloomberg survey called for a 195,000 March advance.

The U.S. sold $28 billion of seven-year securities Wednesday at a yield of 1.606 percent, the last of three note auctions this week totaling $88 billion. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 15.5 percent of the seven-year notes, the most at a sale of the securities since August 2014.

Inflation Expectations

The U.S. economy will probably be strong enough to justify two interest-rate increases in 2016, Chicago Fed President Charles Evans said Wednesday in a CNBC television interview. Evans said he expects the U.S. economy to grow between 2 percent and 2.5 percent in 2016, which would be enough to push the unemployment rate lower, and may lead to a rate increase when the FOMC gathers in June.

Traders see a 20 percent chance the Fed will raise interest rates by June, down from a 38 percent probability assigned on March 28, according to futures data compiled by Bloomberg. The calculation assumes the effective fed funds rate will average 0.625 percent after the Fed’s next increase.

The gap between yields on nominal 10-year notes and equivalent-maturity Treasury Inflation-Protected Securities, a bond-market gauge of expectations for consumer-price growth, climbed for a second day. It shows a 1.66 percent projected annual inflation rate over the next decade.

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