Treasuries outlook: yields fall from multi-month, multi-year highs

US Treasury yields eased from multi-month and multi-year highs on Friday as traders bought US government bonds on the heels of their worst month in nearly eight years in anticipation of an Italian referendum, while the impact of US jobs data was short-lived.
Traders dipped their toes into safe-haven US government bonds ahead of Italy's Sunday vote on constitutional reform and lightened up on bearish bets that had driven benchmark 10-year yields to a 1-1/2-year high of 2.492 percent and three-year yields to a more than 5-1/2-year high of 1.469 percent on Thursday. The Labour Department said nonfarm payrolls increased by 178,000 jobs last month, while the unemployment rate dropped to a more than nine-year low of 4.6 percent.
The jobs growth was largely in line with expectations of economists polled by Reuters. Analysts said the data generally did not alter expectations that the Federal Reserve would raise interest rates later this month and twice next year. "The fact that employment growth continues to be robust is going to give the Fed confidence," said Mark Cabana, head of US short rates strategy at Bank of America Merrill Lynch in New York.
The data had a brief impact on Treasury yields, with benchmark yields jumping to 2.4393 percent before dipping back to a session low of 2.374 percent later in morning trading. US 30-year yields hit a session low of 3.036 percent after touching a 16-1/2-month high of 3.156 percent Thursday.
Traders sold off Treasuries in November on bets that US President-elect Donald Trump's policies and higher oil prices would stoke inflation, which erodes bond prices. "It's a change in focus from pro-growth US policies...to what's going on globally," said Justin Hoogendoorn, head of fixed income strategy at Piper Jaffray in Chicago, on Friday's drop in yields. "Italy is kind of coming back to the forefront." US Treasuries posted a negative 2.7 percent return in November to mark their worst performance since January 2009, according to Bloomberg Barclays index data.
For the week, US 30- and 10-year yields, which are most vulnerable to inflation, were set to rise about five and three basis points, respectively. That would mark their fourth straight week of yield increases. Yields on Treasuries maturing between 2-5 years were set to mark their first weekly yield declines in four, with two-year yields set to fall the most at about three basis points, while 7-year yields were set to rise slightly.