US Treasury Outlook: jobs data may boost bids at auctions

Next week's Treasury supply should fetch solid demand after Friday's disappointing report on job growth pared bets that the US economy is accelerating and lead the Federal Reserve to raise rates by year-end. Fund managers will also deploy cash into Treasuries at least temporarily, as they evaluate opportunities in stocks and riskier assets for higher returns, analysts said on Friday.
The government is scheduled to sell a combined $66 billion in coupon-bearing debt next week: $32 billion in three-year notes on Tuesday; $21 billion in 10-year debt on Wednesday and $13 billion in 30-year bonds on Thursday. Treasury yields jumped in the final two months of 2011, as traders bailed out of bets linked to the Fed's second bout of quantitative easing, worth $600 billion, in an effort to support economic growth. The dramatic sell-off was compounded by a tax deal between the White House and Republic lawmakers.
The yield on benchmark 10-year notes broke a series of key support levels, rising a full percentage point to 3.57 percent, which was a 7-month high. A weaker-than-expected 103,000 payroll increase in December helped revive appetite for Treasuries. It pushed the 10-year yield to 3.32 percent on Friday.
Futures traders now put the chances of an increase in the target rate for overnight lending between banks at the Fed's November meeting at about 42 percent, down from a 64 percent chance prior to the jobs report. Higher Treasury yields are tempting for bargain-minded investors who had refrained from scooping them up at last month's auctions, analysts said. For example, three-year notes were yielding close to 1.00 percent late Friday, above the 0.86 percent at the three-year auction in December.
Analysts are confident that shorter-dated Treasury supply should have no trouble finding a home, as the Fed's super-easy policy and QE2 bond purchases should anchor short-term rates. But the government's huge fiscal deficit and lingering uncertainty over economic growth make holding longer-dated debt a risky proposition, they said. Next week's supply of 10-year and 30-year Treasuries are on track to be sold at its highest levels since last May.