Treasuries Tumble After ADP Employment Tops Highest Estimates

  • 10-year yield touches 2.582%, highest since December
  • Market prices in faster pace of Fed interest-rate hikes

Rising Yields Might Signal an Imminent Fed Rate Hike

Treasuries slumped, pushing 10-year yields to the highest since December, after a measure of U.S. private-sector job growth exceeded the most optimistic expectations two days before the Labor Department’s monthly employment report.

Yields were higher by two to four basis points at about 3 p.m. in New York as the market priced in a faster pace of Fed rate increases following the one already expected next week. The 10-year climbed as much as 6.4 basis points to 2.582 percent, the highest level since Dec. 20. Declines were pared after strong demand for an auction of 10-year notes, awarded at the highest yield since July 2014.

  • ADP Employment increased 298k in February vs 187k median est. in Bloomberg survey, in which highest est. was 255k; Goldman Sachs and Morgan Stanley subsequently raised their forecasts for nonfarm payrolls change in February employment report, and the median est. increased to 200k from 190k
  • Yields across the curve touched the highest levels this year, led by the 5Y, which climbed 6.2bp to 2.111%
  • 5s30s yield curve flattened, touching 104.5bp, within 5bp of lowest levels of recent years
  • USD OIS pricing upgrades odds of 25bp March hike to 87% (versus 83% Tuesday), while odds of a second 25bp hike in September, based on 5th Fed dated OIS, climbed to 97% from 87%
  • $20b 10Y reopening was awarded at 2.560% vs 2.580% WI yield at 1pm ET bidding deadline, produced highest bid-to-cover since June and lowest primary dealer award since May
  • Wednesday’s selloff, outright and on curve, aided the auction; TD strategists recommended initiating a tactical UST 10Y long between the ADP data and the auction, citing barriers to higher yields including lack of clarity on fiscal policy, low global yields and expectation Fed’s March dot plot will be “largely unchanged”
  • Positioning also was supportive; CFTC positioning data show speculators with record net short in TY
  • TIPS underperformed nominal USTs as crude oil fell more than 5% on bearish U.S. inventories data; 5Y breakeven inflation rate fell to 2.02% from 2.05%
  • IG credit issuance slate was also in focus after nearly $40b priced over previous two sessions, weighing on Treasuries; 6 names sold a combined $6.5b Wednesday led by United Health Group with $benchmark 10Y and 30Y offering
  • European bond markets also fell led by Spain and Italy, whose 10Y yields rose more than 7bp

— With assistance by Edward Bolingbroke

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