US Treasury debt prices retreated on Friday, after an early rally inspired by soft US jobs data caved to a backlash of profit-taking. Payrolls figures for May proved much weaker than Wall Street forecasts, prompting a massive rally that took benchmark yields to 14-month lows and 30-year bond yields to their lowest level on record.
Even talk of a possible pause in interest rate hikes from the Federal Reserve began to reemerge as investors considered the possibility that economic growth might slow further.
But after marching solidly higher for nearly a month, exhausted bond bulls appeared to throw in the towel, allowing sellers to come in and flip the market upside down.
"The market is getting annihilated," remarked one trader at a US primary dealer. "That's what happens when you decimate the short base," he added, referring to the swath of investors who have long been betting on a downturn in bonds and had so far been wrong.
Indeed, 10-year notes were down 17/32 for a yield of 3.98 percent, a far cry from an intra-day low of 3.81 percent that marked the lowest reading since March 2004.
The 30-year bond was off 23/32 and yielding 4.29 percent, after hitting 4.15 percent earlier in the session. That was its lowest level since the long bond was first issued in the 1970s.
Five-year notes eased 10/32 to 3.74 percent, up from 3.66 percent on Thursday, while two-year notes dropped 2/32 for a yield of 3.58 percent.
After breaking various technical levels in the past two weeks, the buying spree petered out as dealers agreed that the data were not sufficiently weak to curtail the Fed's monetary tightening cycle.
When all was said and done, Wall Street economists were still predicting the central bank would raise interest rates by another quarter percentage point in June.
A few banks, however, have revised down their estimates for the federal funds rate at the end of 2005, although median forecasts still suggested another full percentage point of tightening was in store this year, which would bring the funds rate to 4 percent.
"For the Fed, 25 basis points is already in the works for June," said Michael Englund, chief economist at Action Economics. "For the Fed meeting after that, there will have been another payrolls report by that time to give evidence of whether this was just a one-month correction."
Traders were so concerned with the jobs figures that they hardly blinked an eye at a modest pullback in the Institute for Supply Management's services sector index.
The Labor Department said US employers added only 78,000 workers to their payrolls in May, the weakest job growth in nearly two years.
The unemployment rate did edge lower to 5.1 percent, but investors place much more weight in the more comprehensive establishment survey, on which the payrolls data are based.
Economists also noted that salaries were still growing at snail's pace, soothing worries about inflation in the bond market after productivity figures this week showed a pick up in wages.
In the ISM survey, the services index fell to 58.5 in May from 61.7 in April, below Wall Street forecasts of a drop to 60.0. The jobs measure barely budged, ticking up to 53.4 from 53.3.
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