By Min Zeng
U.S. Treasury bonds pulled back on Monday, sending 10-year bond
yields to the highest level in nearly two months and extending the
biggest weekly price selloff in nearly two months.
Investors are positioning for a solid jobs report due Friday.
Economists polled by The Wall Street Journal expect 228,000 new
jobs were added last month, sharply rebounding from 126,000 in
March. A brighter growth outlook reduces the attractiveness of
haven bonds.
In the meantime, German government bonds remain under selling
pressure and the price weakness continues to ripple into U.S.
Treasury market.
"We are continuing to react to rising German bund yields," said
Mary Ann Hurley, vice president of trading in Seattle at D.A.
Davidson & Co. "The Treasury bond market is also concerned with
the labor report."
In late-afternoon trading, the yield on the benchmark 10-year
Treasury note was 2.135%, compared with 2.119% on Friday.
The 10-year yield rose for a sixth consecutive day and settled
at the highest closing level since March 9. When bond prices fall,
their yields rise.
On Monday, the yield on the 10-year German bond settled at
0.457%, the highest closing level since Jan. 21. The yield tumbled
to a record closing low of 0.07% on April 20.
Traders said the Treasury bond market is vulnerable for more
selling if U.S. economic indicators allow the Federal Reserve to
potentially raise interest rates sooner than many investors expect.
A rise in the central bank's official rates could shrink the value
of outstanding bonds.
The 10-year Treasury yield jumped to 2.24% in early March, the
highest closing level of the year, after a strong jobs report for
February. The yield was 2.173% at the end of 2014.
Fed officials said last week at their policy meeting that the
first quarter's sharp slowdown was temporary. Economists still
expect the U.S. economy to regain momentum in the summer, a pattern
that was exhibited in the past few years.
Many investors expect the Fed to wait until September or later
to raise rates. But some officials have warned investors that a
rate increase in June isn't off the table.
A selloff in German government bonds over the past week has
rippled through bond markets on both sides of the Atlantic,
highlighting investors' concerns over lofty valuations after a
sharp price rally since the start of 2014.
Bond buyers have benefited from a broad decline in interest
rates over the past year, driven by an uneven pace of global
economic growth, subdued inflation and ultraloose monetary stimulus
from the European Central Bank.
Analysts have cautioned that bondholders are vulnerable if
sentiment turns sour. Even a moderate rise in bond yields--and a
corresponding fall in prices--could more than offset income from
paltry interest payments.
Treasury bonds have been a laggard as the selloff over the past
week chipped away returns. The market--including bills, notes and
bonds--has handed investors a total return of 0.74% this year
through Friday, according to data from Barclays PLC.
Over the same period, Treasury inflation-protected securities
have returned 1.69%. U.S. debt sold by lower-rated companies, or
junk bonds, have returned 3.78%. The S&P 500 stock index has
returned 3.03%. Total return includes price changes and interest or
dividend payments.
COUPON ISSUE PRICE CHANGE YIELD CHANGE
1/2% 2-year 99 26/32 up 1/32 0.599% -0.5BP
3/4% 3-year 99 14/32 up 1/32 0.944% -1.1BP
1 3/8% 5-year 99 13/32 up 1/32 1.499% -0.6BP
1 3/4% 7-year 99 4/32 flat 1.884% flat
2% 10-year 98 26/32 dn 5/32 2.135% +1.6BP
2 1/2% 30-year 92 22/32 dn 26/32 2.867% +4.3BP
2-10-Yr Yield Spread: +153.6BPS +151.2BPS
Source: Tradeweb/WSJ Market Data Group
Write to Min Zeng at min.zeng@wsj.com