NEW YORK, June 2: US government debt prices slid on Friday after strong data on labour and manufacturing all but quashed the market's remaining hopes for a Federal Reserve interest-rate cut this year.
The retreat sent benchmark yields, which move inversely to prices, to their highest levels in more than nine months.
An increase of 157,000 in US nonfarm payroll jobs in May, a rise in the Institute for Supply Management's May manufacturing index and the Reuters/ University of Michigan consumer sentiment data all signaled that the US economy reaccelerated in the second quarter, analysts said.
The message that the bond market took away from these data was that risk of a slowdown or recession is minimal and that growth will be maintained in the quarters ahead at a pace that will prevent the Fed from lowering interest rates, said Michael Moran, chief economist at Daiwa Securities America.
Two-year note yields, which closely respond to expectations for Fed rate moves, were headed for their biggest one-day jump since early April, analysts said, rising to 4.98 per cent from 4.92 per cent on Thursday.
The Federal Reserve has held its overnight lending rate steady at 5.25 per cent since June 2006.
Sellers of bonds put aside bond-friendly news on inflation contained in the April personal consumption expenditure (PCE) core price index, a favoured inflation measure of the Fed.
Traders focused more on the economy and are waiting for more proof that inflation is easing, said Gary Thayer, chief economist at A.G. Edwards and Sons.
In this case, past is not prologue: Even though the PCE core deflator dropped into the Fed's comfort zone, that doesn't guarantee that price pressures will stay under control, said William Sullivan, chief economist at JVB Financial Group. With a drum-tight labour market that could sow the seeds of future inflationary pressures, the Fed is not in a position to lower interest rates anytime soon.” Benchmark 10-year notes fell 16/32, their yields rising to 4.96 per cent from 4.89 per cent late on Thursday.
Technical imperatives also fed the selling, analysts said. Whenever the market breaks out of an established range, it will continue to go and don't ask how far, said Chris Rupkey, senior financial economist at Bank of Tokyo/Mitsubishi.
Yields have been climbing for the last couple of months, so there's a lot of momentum behind this move, he said. The dominant trend is for yields to keep rising.” Thomas di Galoma, head of US Treasury trading with Jefferies & Co. in New York, said the next level for the 10-year note's yield would be closer to 5.01 or 5.02 per cent.
Mortgage players also became involved in Friday's Treasury market sell-off, traders said.
Rising Treasury yields make mortgages more prone to extension risk, which happens when investors are left holding lower-yielding MBS for longer than they had anticipated.
When rates head higher, participants in the mortgage market, particularly servicers, usually need to hedge by selling Treasuries, paying in swaps or by shedding MBS.—Reuters