Treasuries decline

US Treasuries may reverse some weakness if payroll data on Friday meets expectations and the head of the New York Federal Reserve bank counters fears that the Fed will quickly withdraw monetary stimulus. Traders are focusing on employment data on Friday that some are betting will show much higher job growth than economists' consensus estimates for March of 190,000.
A speech by New York Fed President William Dudley is also expected to provide a counterpoint to recent hawkish statements by other Fed members that have weighed on Treasury yields. "A lot of people are looking to Bill Dudley's speech tomorrow to be pretty bullish for the market, to offset some of the bearish tone we've gotten out of some of the Fed governors," said Tom Tucci, head of government bond trading at RBC Capital Markets in New York.
"That might be more important than the payroll number tomorrow," he added. Minneapolis Fed President Narayana Kocherlakota said the Central bank could raise rates by three-quarters of a percentage point by the end of 2011, far earlier than most investors currently expect, according to a Wall Street Journal report on Thursday. Traders have already priced in high expectations for Friday's employment data, making it less likely that a positive number will provoke further selling. "If they don't get well north of 200,000, I think people will be relieved," said Jim Golden, head of Treasury trading at Jefferies & Co in New York.
A two-week selloff that has sent benchmark ten-year note yields 30 basis points higher into the quarter-end may have exhausted bond selling for the near term. "So many things are lining up against the market that everyone is positioned against it, and they've already sold, so there doesn't seem to be many sellers left," said Golden.
Treasuries weakened in various bouts of selling on Thursday, which may have been prompted by investors tidying books for quarter-end. The debt saw a rapid drop in prices in midmorning, which more than erased earlier price rises. Traders said the drop may have been caused by a fund manager liquidating a large position in long-dated futures and Treasury bonds.
Ten-year notes were last down 7/32 in price to yield 3.47 percent. This debt ended the quarter little changed and in the middle of a wide range that sent the notes as high as 3.77 percent in February and as low as 3.14 percent earlier this month. The end of the Fed's $600 billion buying program in June is already weighing on Treasury yields, as some investors fear the debt will need to offer more attractive returns to lure back other buyers.
Traders also fear how fast the Fed will then move to sell Treasury bond holdings and unwind other monetary stimulus. With no supply, little economic data of significance and continuing Fed buybacks next week, however, rates may stabilise or give back some losses before starting any new leg lower.
"Longer term, inflation is moving up, the economy is doing better, and the crises in Europe, the Middle East and Japan are fading, though it's still a bad situation," said Jefferies' Golden. "Overall there's a pathway to higher rates going forward, but that isn't today or next week." Five-year notes fell 7/32 in price to yield 2.26 percent, up from 2.21 percent on Thursday, and 30-year bonds dropped 2/32 in price to yield 4.51 percent, up from 4.50 percent.