Treasuries Slide as Investors Cut Risk Before Employment Report

  • Two- and five-year yields trade at highest levels in years
  • Bond auction draws highest yield since 2014, large direct bid

Treasuries fell, sending five-year yields to their highest levels since 2011, ahead of the Labor Department’s employment report for February on Friday, which has potential to cement expectations for a faster pace of Federal Reserve rate increases.

The five-year yield climbed as much as four basis points to 2.133 percent, exceeding last year’s peak by about a basis point. Ten- and 30-year yields rose more than four basis points, each coming within about three basis points of last year’s highs. Led in early U.S. trading by euro-zone bond markets after European Central Bank President Mario Draghi said economic risks are less pronounced, the selloff accelerated at about 1:30 p.m. in New York, concurrently with a drop in U.S. equity benchmarks.

  • “We continue to see better selling by structural longs pressured by the move higher in rates,” said Thomas Roth, head of U.S. Treasury trading at MUFG Securities Inc. The 2.62 percent yield level, the high on Dec. 16, is key for the 10-year and unlikely to be breached before the jobs report, he said.
  • The German 10-year yield climbed as much as 5.6 basis points after Draghi said the ECB tweaked its statement language to signal that there’s no longer a sense of urgency prompted by deflation risks.
  • The Treasury’s third and final auction of the week, a $12 billion 30-year reopening, was awarded at 3.170%, the highest 30-year auction yield since September 2014.
  • Treasuries extended Wednesday’s declines, in which yields climbed after stronger-than-forecast private sector employment data for February caused market to price in a faster pace of Fed rate increases this year.
  • 30Y auction stopped slightly above the WI yield at the 1pm ET bidding deadline; 25.8% primary dealer award was lowest since last July’s record low (23.1%) as direct award surged to 13.1%, highest since October 2015, offsetting a drop in indirect award to 61.1%.
  • Strategist commentary on 30Y auction focused on extent to which investors might be deterred by rising yields and curve flattening driven by Fed outlook, offset by appetite for duration evident in futures positioning and demand for Strips.
    • Wednesday’s 10Y reopening, awarded at highest yield since July 2014, stopped through by nearly 2bp, produced highest bid-to-cover since June and lowest primary dealer award since May.
  • Treasuries drew support in early U.S. trading from gains for gilts after strong demand for an auction of inflation-linked bonds, and from oil’s drop below $50 a barrel, lowest since November.
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