Treasury Rally Spurred by Dovish Fed Falters Before Jobs Report

Updated on
  • U.S. nonfarm payrolls seen above 200,000 for a second month
  • Fed's policy of slow rate increases will support bonds: Nordea

Treasuries fell, trimming this week’s gain, before a labor-market report that’s forecast to show the U.S. economic recovery remains on track.

Employers added more than 200,000 jobs for a second straight month in March, while wages rose, economists surveyed by Bloomberg predicted. Ten-year note yields are still hovering around the lowest in a month, though, and Nordea Bank AB says today’s move is mostly a retracement and unlikely to last.

“It’s a small rebound in falling yields,” said Jan Von Gerich, chief strategist at Nordea in Helsinki. “The big picture remains that the Federal Reserve is more dovish than the domestic economic developments in the U.S. would justify, and that will keep the U.S. Treasury market supported.”

The 10-year Treasury yield climbed two basis points, or 0.02 percentage point, to 1.79 percent as of 7:10 a.m. in New York, according to Bloomberg Bond Trader data. The 1.625 percent security due in February 2026 fell 5/32, or $1.56 per $1,000 face amount, to 98 17/32. The yield has still dropped 11 basis points this week.

Treasuries have been supported since the Fed’s latest policy decision on March 16, when officials scaled back forecasts of how quickly they’ll raise interest rates this year. But signs of a buoyant economy may cause investors to re-assess how dovish the central bank will be.

The Bloomberg ECO U.S. Surprise Index climbed above zero for the first time in more than a year, an indication that economic data are surpassing analysts’ forecasts.

The Fed primarily monitors inflation as it gauges whether the economy is strong enough to withstand another rate boost after December’s increase. The annual change in the Commerce Department’s price index tied to personal spending, one of the gauges officials watch, has been below the central bank’s 2 percent target since 2012.

The central bank will probably limit its rate increases to two this year, said Hajime Nagata, a bond investor in Tokyo for Diam Co., which manages $154.6 billion. The company’s Treasury holdings have a longer duration than those in the benchmark it uses to gauge performance, he said.

“The U.S. economy is not so strong,” Nagata said. “I don’t believe Treasury yields will move much higher.”