US Treasuries prices plunged on Friday as a surge in US payrolls surprised investors who had bought bonds aggressively last week after the Federal Reserve vowed to keep ultra-low interest rates until late 2014. Benchmark 10-year Treasuries lost one point in price after the US Labour Department said the economy created jobs at the fastest pace in nine months in January, driving the unemployment rate to 8.3 percent, a near-three year low.
---- Traders undo long bond positions; some bet on higher rates
---- Price of 10-year falls 1 point, 30-year drops nearly 3 points
The numbers, which came in way above market expectations, corroborated weeks of strong US economic data and stoked the appetite for risk. The data reduced the chance of further monetary stimulus from the Fed, economists said. Some traders even started to bet that interest rates could rise in early 2014, causing investors in general to reassess their long Treasuries positions.
"We're seeing widespread gains across the economy," said Russell Price, senior economist with Ameriprise Financial in Detroit. "It significantly curtails the expectations for any further QE3, or the need for any further quantitative easing." Ten-year notes dropped 1-4/32 in price to yield 1.95 percent, the highest yield in more than one week and up from 1.82 percent late on Thursday. Thirty-year bonds plunged 1-26/32 in price to yield 3.15 percent, up from 3.01 percent.
Also curtailing demand for safe-haven Treasuries was a report by the Institute of Supply Management showing the US services sector, which accounts for more than two-thirds of the country's economic activity, notched its strongest growth rate in nearly one year in January as new orders and employment jumped.
"The ISM was a little bit of a confirmation of the jobs data," said Lou Brien, market strategist at DRW Trading in Chicago. Some investors started dumping their long Treasuries positions as the outlook for the economy improved, driving some dealers to bet on inflation and higher interest rates earlier in 2014.
Fed fund futures were pricing in a 38 percent chance of a January 2014 rate hike, up from 29 percent before the payrolls report. The first better-than-even chance of a rate hike was in April 2014, according to CME Group, where the contracts are traded. According to Jefferies, dealers were long Treasuries by $91 billion on January 25, the second-highest long position on record. Also contributing to the sell-off in Treasuries is next week's planned sale of $72 billion worth of debt by the Treasury.
"This will make for some interesting auctions next week, especially on the long end," said DRW's Brien. "I think they will be more difficult now than I was looking for them to be earlier." Despite the encouraging economic data, a number of factors still support Treasuries yields, said Ira Jersey, interest rate strategist at Credit Suisse in New York.
"Even though the employment number was good, you still have a lot of slack in the labour force and we still have well over 8 percent unemployment, so inflation expectations are unlikely to be a significant driver of rates in the very near term," said Jersey, who expects 10-year note yields to stay below 2 percent in the coming weeks.
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