Updated from 11:06 a.m. EDT
Treasuries eked out slim gains Wednesday as employment data became the market's sole obsession ahead of Friday's March payrolls report.
On Thursday, the Labor Department will release a reading on weekly jobless claims, and Wall Street expects the number to hold steady at 305,000. The report will be closely watched for evidence that hiring is weakening, particularly in light of Wednesday's ISM report.
The March ISM non-manufacturing sector index came in at 60.5 from 60.1 in the previous month, defying expectations for a slight dip to 59.0. But beyond the headline number, the employment component fell to 54.6 from February's 58.2.
"The ISM was a mixed number, in that the total number was higher but some of the details were weak," says Rick Klingman, chief Treasuries trader at ABN Amro. "Most important was the
soft employment component. With Friday's number, everyone was looking at it a little more carefully."
Bonds gave back some of their early advance after Treasury Secretary John Snow said that Friday's upcoming March jobs report would be "good numbers." The employment picture is seen as the key to when the Fed will stop raising interest rates.
The benchmark 10-year note ended the day up 4/32 to yield 4.85%, while the 30-year bond gained 3/32 to yield 4.90%. Bond prices and yields move in opposite directions.
The two-year was little changed to yield 4.80%, and the five-year gained 2/32 to yield 4.79%.
Early in the morning, government bonds rallied on comments from Kansas City Federal President Thomas Hoenig. "We're very close to where we need to be," referring to achieving a neutral interest rate level, he said Tuesday evening before a group of local business leaders in Kansas City. However, Hoenig also said that a pickup in growth would complicate the Fed's decision making process.
Hoenig's remarks imply that the Fed is "thinking of the endgame near 5%," says David Ader, U.S. government bond strategist at RBS Greenwich Capital. "
The market got another Fed-related bid."
But even though there has been evidence that the payroll number on Friday could surprise to the downside, Ader says there is growing optimism that yield could dip because of more dovish rhetoric from Hoenig, the re-emergence of longer-term buyers and oversold market conditions.
But Klingman says the market is being a bit too optimistic about the Hoenig's comments. "We've seen comments from others that do not imply that the Fed is about to stop. Most importantly, the most recent Fed statement does not say that the end is near," he says.
Hoenig is not a member of the policy-setting Federal Open Market Committee. Interest-rate futures show 100% odds that the FOMC will raise rates to 5% at its next meeting on May 10, and 30% odds for a hike to 5.25% in June.
In corporate bonds Wednesday,
sold $4.75 billion in notes and
sold $600 million in paper.