By Min Zeng
U.S. government bonds suffered the biggest one-day selloff since
November 2013 as a solid U.S. employment report stoked fears that
the Federal Reserve may raise interest rates in June.
Investors including hedge funds and portfolio managers shed
holdings as they are worried that higher official interest rates
from the central bank would undermine the value of outstanding
bonds. Traders said the selloff reminded them of the "taper
tantrum" during the summer of 2013 when the bond market was rattled
by concerns of a pullback in the Fed's bond-buying monetary
stimulus.
"The selloff is seriously ugly and quite bloody," said
Christopher Sullivan, who oversees $2.45 billion as chief
investment officer at the United Nations Federal Credit Union. "The
U.S. economy is poised to continue to be on an upward slope. A rate
increase in June cannot be ruled out."
Worries over the Fed's policy outlook also pushed down prices in
U.S. stocks, gold, copper, silver and crude oil as investors are
grappling with the prospect that the central bank's zero
interest-rate policy may end sooner than expected. The Fed's
monetary stimulus following the 2008 financial crisis has been a
big factor pushing up the value of many global markets.
The yield on the benchmark 10-year Treasury note soared to
2.239%, the highest closing level since Dec. 26, compared with
2.110% on Thursday. Yields rise as bond prices fall.
Friday's bond price plunge deepened the selloff in the bond
market over the past month, though the yield remains very low
compared with a year ago.
The U.S. economy added 295,000 new jobs last month, the Labor
Department said on Friday. Economists polled by The Wall Street
Journal had expected 240,000. The unemployment rate fell to 5.5% in
February from January's 5.7%.
Uncertainty over the timing for the Fed to act has turned
trading in the bond market more volatile over the past month.
U.S. job growth has gained traction over the past year but
inflation, such as wage growth, remains low, which has supported
the Fed's policy of being patient. Meanwhile, a stronger dollar
reduces U.S. exporters' competitiveness in global trades and acts
to disinflationary pressure, making it harder for the Fed to move
inflation back to its 2% target.
Fed Chairwoman Janet Yellen said in late February that the
timing of an interest-rate increase depends on how the economy
performs.
Ward McCarthy, chief financial economist within the fixed income
group at Jefferies LLC, said the magnitude of Friday's selloff
suggests "the market got caught leaning the wrong way because of
expectations that the bad weather in February would suppress job
growth as it did a year ago."
Mr. McCarthy expects the bond market to be "very volatile" this
year. The market "will move ahead of the Fed and probably price in
a rate increase on a number of occasion before the Fed finally
implements the liftoff," he said.
Fed-funds futures, used by investors and traders to place bets
on central bank policy, showed Friday that investors see a 22%
likelihood of a rate increase in June, compared with 16% a day
earlier, according to data from the CME.
The odds of a rate increase at the September Fed meeting were
64% on Friday, compared with 51% on Thursday.
The Fed's next policy meeting is scheduled on March 17-18.
There were some numbers in the jobs report that may lead policy
makers to be cautious. Average hourly earnings among private-sector
workers rose 3 cents last month to $24.78. Wages were up 2% from a
year earlier, a slightly slower annual gain than January's annual
gain of 2.2%.
Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in
New York, said tame wage pressure means the Fed isn't going to be
"very aggressive" in raising interest rates, especially when many
other central banks have either cut interest rates or launched
bond-buying programs to support growth.
Many investors say bond yields aren't going to rise
significantly. Investors have been struggling to find bonds that
offer a mix of safety and income in the current low-yield world. A
rising dollar adds to the allure of buying U.S. bonds for foreign
investors. The dollar soared to the highest level since 2003
against the euro on Friday.
Rick Klingman, managing director of U.S. Treasury trading at
Societe Generale SA in New York, said some foreign buyers stepped
in after the selloff following the jobs report, including both
central banks and money managers.
"The theme remains: there are not lots of places where you can
get attractive yields" in high-grade government bond markets, he
said.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/2% 2-year 99 18/32 dn 5/32 0.723% +8.0BP
1% 3-year 99 19/32 dn 9/32 1.138% +10.0BP
1 3/8% 5-year 98 16/32 dn 18/32 1.692% +11.0BP
1 3/4% 7-year 98 4/32 dn 26/32 2.037% +12.5BP
2% 10-year 97 28/32 dn 1 5/32 2.239% +12.9BP
2 1/2% 30-year 93 8/32 dn 2 12/32 2.838% +12.2BP
2-10-Yr Yield Spread: +151.6BPS +146.7BPS
Source: Tradeweb/WSJ Market Data Group
Write to Min Zeng at min.zeng@wsj.com