US government bonds tumbled on Thursday after strong data on jobs and services dimmed remaining hopes of a Federal Reserve rate cut anytime soon, while markets braced for Friday's monthly employment report. The Institute for Supply Management's gauge of the service sector hit its highest in over a year.
While a report on employment in the private sector showed surprising strength. Both releases sent bonds lurching lower. The data reinforced bearish sentiment emanating from overseas bond markets, where British and euro zone debt slid after the Bank of England hiked rates to a six-year high and the European Central Bank backed expectations for more tightening.
"The economy is firing on more than just one engine," said T.J. Marta, fixed income strategist at RBC Capital Markets. "I really do believe we'll get back to trend growth in gross domestic product and that is why the market is giving up some ground here, the realisation that that is going to happen," Marta said.
The signs of continuing strength in employment forced the bond market to face the possibility of a robust outcome in Friday's nonfarm payrolls report, which could push debt prices down further.
"We're going into tomorrow's nonfarm payrolls looking at a strong number," said Marta. Treasuries were also catching up with losses in global bond markets on Wednesday, when the United States was observing the Independence Day holiday. Thursday's falls left two-year notes on track for their biggest rise in yields since April.
Prices on benchmark 10-year notes tumbled 24/32, pushing the yield up to 5.15 percent from 5.05 percent late on Tuesday. Bond yields move inversely to prices. The losses gave 10-year yields their biggest one-day rise since June 12, when bond markets were overcome with fear that strong global growth would prolong central banks' fight to keep inflation under control.
Even if the Fed continues to hold rates steady at 5.25 percent, as it has done for the last year, analysts said Treasuries could suffer as monetary tightening elsewhere produces more attractive yields in foreign bond markets. "We saw the losses generate from the rise in rates from the Bank of England. It was foreign rate concern that other banks might follow suit," said Don Kowalchik, debt strategist at A.G. Edwards & Sons in St. Louis.
"If you start seeing several foreign central banks raising rates, then funds could move in those directions rather than into Treasuries and that certainly would be another reason to see money flow out of the US market into foreign markets."
Two-year Treasury notes fell 5/32, lifting yields to 4.98 percent from 4.88 percent late on Tuesday. Five-year notes plunged 16/32, forcing yields up to 5.06 percent from 4.94 percent. Thirty-year bonds slid well over a full point and were last trading down 1-14/32 for a yield of 5.24 percent, up from 5.141 percent late on Tuesday.