The Treasury market rallied hugely immediately following this morning's 8:30 a.m. EDT release of the May employment report, but most of the gains eroded over the course of the day as traders booked profits on a very good week. When it was over, prices were only modestly higher on the day.
Still, yields wound up at their lowest levels in a month or more, as traders interpreted the much-weaker-than-expected May jobs report to mean that the economy is finally slowing, making the
Fed less likely to continue hiking interest rates.
Chicago Board of Trade
fed funds futures are traded, traders downgraded the likelihood of a hike from 6.5% to 6.75% at the Fed's next meeting on June 27-28 to 44% from 84%. They downgraded the chance of a 50-basis-point hike at the subsequent meeting on Aug. 22 to 58% from 80%. They remain convinced, though, that the Fed will hike by 25 basis points in August.
The benchmark 10-year Treasury note, which rose as much as 1 18/32 in the half hour after the jobs report was released, ended up just 4/32 at 102 12/32, dropping its yield 1.9 basis points to 6.169%, the lowest since April 26. Shorter-maturity issues fared better, as they typically do when the prospects for rate hikes fade. The two-year note, for example, ended up 5/32 at 100 5/32, cutting its yield 6.9 basis points to 6.526%, the lowest since April 27.
The 30-year Treasury bond gained as much as 1 29/32 intraday, but ended unchanged at 104 8/32, its yield 5.944%. At the
Chicago Board of Trade
, the September
Treasury futures contract rose 7/32 to 96 20/32.
Market analysts said Treasuries failed to hang onto their early gains mainly because they had posted such big gains earlier in the week, encouraging profit taking. On Tuesday, the two-year's yield stood at 6.727%, the 10-year's at 6. 375% and the 30-year's at 6.087%. "You can't really complain about that,"
government bond strategist Jerry Lucas observed.
"Most people felt the Treasury market has been getting ahead of itself the last few days," concurred Jim Newman, an agency securities trader at
The rally dragged Treasury yields down to levels relative to the fed funds rate where investors couldn't get motivated to buy, said Jim Kochan, bond market strategist at
Robert W. Baird
in Milwaukee. "Buyers are not interested in acquiring securities at these levels. They're too expensive relative to 6.5% funds."
At the same time, Newman noted, a portion of the early rally may have been represented short-covering by people who were betting on a much stronger jobs report, rather than buying by people who were enthusiastic about the weak report.
Moreover, there may have been some second-guessing as the day wore on about how much the course of Fed policy will be altered by today's events.
"One or two pieces of economic data are not enough to convince people the funds rate is not going to 7%," Baird's Kochan said. "Private payrolls still growing faster than they were a year ago. The verdict is still out here on what the Fed's going to do in June and beyond."
Today's huge rally in the stock market may also have played a role in the turnaround in the bond market. By emboldening consumers to remain on their spending binge, the theory goes, rising stock prices help keep the economy growing at a fast clip. "The Fed can't be pleased by these rallies," Kochan said. "It doesn't make their job any easier."
In any case, the action doesn't bode well, Mark Mahoney, Treasury market strategist at
, said. "This is technically very bad, what's going on right now," he said. A close so far below the highs of the day constitutes "a failure, and we're going to continue going lower next week," he said. "Perhaps this data is a headfake, and we get stronger data next month?"
The May employment report surprised economists with the news that nonfarm payrolls expanded by just 231,000. The economists were forecasting a gain of 386,000 on average, according to a
poll. And temporary hiring of workers to conduct the Census accounted for every last one of the new jobs. Private-sector payrolls contracted by 116,000, their biggest drop since November 1991. The weakness was broad-based, with losses in almost every major job category. Over the previous 12 months, private payrolls grew by an average of 215,000 a month.
As important as the slowdown in the pace of job creation, from a Fed perspective, was a rise in the unemployment rate from the 30-year low of 3.9% reached in April to 4.1%. A low unemployment rate can force employers to pay up for workers, which can lead to higher inflation.
The final piece of good news in the report was a smaller-than-expected 0.1% rise in average hourly earnings. A 0.4% gain had been forecast.
In other economic news,
fell 4.3% in April. As part of the same report, the decline in April
durable goods orders
was revised to 6.5% from 6.4%.
Currency and Commodities
The dollar fell against the yen and the euro. It lately was worth 108.00 yen, down from 108.52. The euro was worth $0.9464, up from $0.9313. For more on currencies, please take a look at
Crude oil for July delivery at the
New York Mercantile Exchange
rose to $30.32 a barrel from $30.14.
Bridge Commodity Research Bureau Index
rose to 225.42 from 223.50.
Gold for August delivery at the
soared to a two-month high of $284.10 an ounce from $275.40.