US Treasury prices gained on Thursday as investors squared positions after a volatile selloff on Wednesday and set up for employment data on Friday that is expected to set the direction of interest rates for the month. The government debt held a more positive tone, regaining its footing after a much stronger employment report by ADP Employer Services that caused investors to increase expectations for Friday's payroll report.
"There's some position squaring for tomorrow's report, so it's a little bit of a choppy trade, but I expect tomorrow to set the tone for this month in terms of where we go in rates," said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. Economists expect the data will show that employers added 175,000 jobs in December, and a number that shows much stronger growth than this would likely spark renewed selling, and higher yields.
The report could disappoint, however, even if growth is strong, due to high expectations already baked into the market, traders and analysts said. "People are setting for some disappointments in payrolls," said Sergey Bondarchuk, interest rate strategist at BNP Paribas in New York.
Benchmark 10-year notes rose 13/32 in price, with yields falling to 3.42 percent from as high as 3.50 percent on Wednesday. The yields have jumped from 2.93 percent at the beginning of December. Wednesday's selloff took benchmark yields back closer to recent highs or 3.57 percent set in mid-December, and analysts said strong technical support for the yields remains near this level.
Several quarters of gross domestic product growth above 3 percent would be needed for benchmark yields to approach the 4 percent area, said Sharon Stark, chief fixed income strategist at Sterne Agee in Birmingham, Alabama. A breach above 4 percent would have significant economic repercussions and would likely need to be accompanied by strong growth, higher inflation readings and an environment in which the Federal Reserve was closer to raising interest rates.
"A move above 4 percent would be difficult to have without an unanchoring in inflation or the fed funds rate," said Tony Crescenzi, portfolio manager at PIMCO in Newport Beach, California. Ten-year note yields have traded below 3.5 percent since May of last year. The notes yields have traded below 4 percent since the credit crisis hit in 2008. Economic growth is likely to pick up in the second half of the year, however, which could lead the notes yields to end the year bear the 4 percent area, said Sterne Agee's Stark.
A break above the 4 percent yield level would signal a new multi-year trend for US interest rates, technical analysts at Credit Suisse said in a report. There is "formidable" support for 10-year yields at around 3.90 to 4 percent and any break above this "would mark a multiyear bearish reversal, for a 4.40 percent initial target," they said.
A move above the 4.90 percent yield level in 30-year bonds would also be a very bearish signal for the debt, the analysts said. Long bonds rose 5/32 in price on Thursday, with yields falling to 4.53 percent, down from their recent high in mid-December of 4.62 percent.
"Above 4.90 percent at any stage would not only see a multi-year base complete, but would also see key trend support from 1993/1994 broken," Credit Suisse said. "We would expect this to provide the platform for a significant bear trend, with 5.44/46 percent seen as just a minimum and initial target," they said.