Treasuries fell, pushing yields on 10-year notes up the most since September, after stronger-than-forecast job gains suggested the economy is poised to accelerate after being hampered by severe winter weather.
Treasuries fell on Friday for a fourth day, the longest slump this year, after the economy added 175,000 jobs in February, the most since November. Benchmark yields have slid 0.26 percentage point from the 2014 high of 3.05 percent on Jan. 2, after turmoil between Russia and Ukraine over Crimea had pushed them to within two basis points of their 2014 low. The Treasury will sell $64 billion of notes and bonds next week.
“A lot of the intermittent weakness may not have been as bad as it optically appeared,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 22 primary dealers that trade with the Federal Reserve. “The impulse that has kept yields low is related to the drumbeat of consistent downward surprises. Once that's removed, rates do have the potential to sell off.”
The benchmark 10-year note yield rose 14 basis points, or 0.14 percentage point, to 2.79 percent on the week, Bloomberg Bond Trader data show. The 2.75 percent security due in February 2024 declined 1 7/32 or $12.19 cents per $1,000 face amount, to 99 21/32.
The rise in yields was the biggest since the week ended Sept. 6, when 10-year yields reached a two-year high amid speculation a strengthening economy would allow the Fed to begin slowing bond purchases.
Two-year note yields rose five basis points to 0.37 percent, the highest close since Jan. 22. The yield difference between two- and 10-year Treasuries, known as the yield curve, widened to 241 basis points yesterday and is up from 230 basis points on March 3.
Severe winter weather has spawned a debate about how much of the drop-off from last year's pace of job gains is attributable to a softening in the economy.
“The market was caught off guard” by the stronger-than-forecast employment gains, said Sean Simko, a money manager who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “There was the expectation that the weather was going to impact this number adversely.”
The 175,000 gain in employment followed a revised 129,000 increase the prior month that was bigger than initially estimated, Labor Department figures showed in Washington. The median forecast of economists in a Bloomberg survey called for a 149,000 advance in February. Unemployment rose to 6.7 percent from 6.6 percent as more people entered the labor force and couldn't find work.
“It keeps the Fed on track with tapering,” Simko said.
Fed policy makers' decision to trim buying further at their January meeting showed they were sticking to their plan for a gradual withdrawal from the program, designed to cap long-term borrowing costs and spur growth, as the economy progresses. They said labor-market data were “mixed but on balance showed further improvement.”
The Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent.
The central bank's preferred gauge of consumer prices rose 1.2 percent in January from a year earlier and hasn't exceeded 2 percent since March 2012.
The probability that the Fed will raise its benchmark overnight rate to at least 0.5 percent by the end of January 2015 rose to 15.4 percent on Saturday from 12.4 percent on Friday and from 10.3 percent a month ago, fed funds futures prices show.
Investors should “sell what the Fed has been buying because they won't be buying them when Taper ends in Oct.,” Bill Gross, manager of the $243 billion Total Return Fund at Pacific Investment Management Co., wrote in a comment on Twitter.
In its December “Strategy Spotlight,” Pimco wrote that the Fed's plans to keep interest rates low were more important than its decision to taper its bond purchases, and as such Pimco's funds would bet on the shorter-term debt while pulling back from five-, 10- and 30-year exposures.
While the 10-year yield remains below its 2014 high, it is above its five-year average of 2.7 percent. The extra yield 10-year notes offer over G-7 peers climbed as high as 59 basis points, the most since April 2010.
Treasuries were at the cheapest levels since Jan. 22, based on closing prices, according to the term premium, a Columbia Management model that includes expectations for interest rates, growth and inflation. The gauge was at 0.53 percent. A value of 0.50 percent to 0.75 percent is considered normal for a developed-market economy with slow inflation. The average over the past decade is 0.20 percent
Inflows to equity exchange traded funds are narrowing the gap with their fixed income counterparts as investors pulled $855 million out from exchange-traded funds of U.S. fixed income securities on Friday. That compares with the five-day average of $8.6 billion in outflows and a 20-day average of inflows of $676 million, suggesting a diminished appetite for debt, according to ETF data compiled by Bloomberg.
Investors are increasingly favoring ETFs investing in U.S. stocks, which took in $935 million on March 6, below the 20-day average of $2.01 billion, Bloomberg data show.
Inflows into fixed-income are still out-pacing inflows into U.S. equities as U.S. fixed-income ETFs have taken in $8.9 billion so far this year, compared with $5 billion in outflows from domestic equity funds, Bloomberg data show.
Hedge-fund managers and other large speculators decreased their net-long position in 30-year bond futures in the week ending March 4 to the least since December, according to U.S. Commodity Futures Trading Commission data. Bets prices will rise outnumbered short positions by 16,858 contracts on the Chicago Board of Trade, the smallest since Dec. 27.
Net-long positions fell by 30,425 contracts, or 64 percent, from a week earlier, the Washington-based commission said.
Investors increased their net-short position in 10-year note futures, with speculative short positions outnumbering long positions by 101,370 contracts. Net-short positions rose by 88,403 contracts, or 682 percent, from a week earlier.