If the financial markets were a high school, for three days Treasuries have walked around with a big "kick me" sign on its back. The bond market was bullied into submission again today by stronger-than-expected economic data. With the
looming tomorrow morning, Friday isn't fixing to be an improvement.
Lately the 30-year Treasury bond was down 19/32 to trade at 99 11/32, but off the lows of the day. The yield rose to 5.29%, the highest closing yield since Nov. 16.
Expectations as reported by
Today's economic culprits were the
initial jobless claims
reports. Both came in better than forecast. Add in a rumor that tomorrow's employment report will reveal 350,000 in new nonfarm payrolls, and you've got a spooked bond market. At one point down 1 4/32, the on-the-run bonds never really recovered through the balance of the day. The March futures contract closed down 31/32 to 124 20/32.
The initial jobless claims report rang in at 292,000, the lowest figure for a single week since Sept. 26. What are more disturbing heading into tomorrow's employment report are the recent downward revisions in claims, including the employment survey week (which includes the 12th of the month). Last week, jobless claims for the Jan. 10 to Jan. 16 period were revised downward from 345,000 to 316,000. The Jan. 23 figure was 301,000. In three weeks, the four-week moving average for claims fell from 358,000 to 317,250.
"I scarcely remember a serious slowdown where claims didn't shoot up before a general economic drift lower," said Russell Sheldon, chief economist at
. "Since the holiday, claims have been as low as we've seen them."
Rumors usually run a quick course -- they're circulated and discarded. But today's rumor -- that nonfarm payrolls might weigh in at a whopping 350,000 (expectations are for 135,000) -- had an added measure of credibility, if only because the
Bureau of Labor Statistics
at times seems to be throwing monkeys at the keyboard. They managed two screw-ups in three months by releasing the October employment and the January
Producer Price Index
early. To the BLS' credit, it was rumored that they'd leaked last week's
employment cost index
report, and that it would rise 1.2%. That was untrue -- and it only rose 0.7%.
It turned out to be "bogus," according to a comment from Tony Crescenzi at
Miller Tabak Hirsch
, but the damage was done. Had the rumor not cropped up, it wasn't looking good for Treasuries today as it was. The barrage of good economic news bounced the 30-year bond out of the rough 5.10% to 5.25% range it maintained during the last month and a half.
"What we've done is taken out some of the excess optimism but there's not a great deal of pessimism yet," said Jim Kochan, market strategist at
Robert W. Baird
Baird and Sheldon both expressed the view that another round of strong economic data would enhance the thinking that the Fed either moved to a tightening bias at this week's
Federal Open Market Committee
meeting or may seek to do so at its March 30 meeting. Minutes from the Dec. 22 FOMC meeting reveals the Fed viewed the risks as balanced on that date.
"My sense is that the risks are much more balanced, and even starting to tilt toward the next Fed move going up," Sheldon said. "But the forecast of rising inflation has been easy to fight, and the bond market is used to having it around. There's a lot of resistance to that idea, and we'd need another month or two of bad numbers before
the market believes inflation is going up."
Ian Shepardson, chief economist at
High Frequency Economics
, thinks the bias should shift to a tightening already. "It is clear the November rate cut was a mistake based largely on a couple of lower payroll numbers and a seriously erroneous slowdown forecast, but they are too scared to reverse it," he said in a comment.
The when-issued 30-year bond -- that is, the bond-to-be -- was yielding 5.23% today, a decline from yesterday's yield, 5.25%. The Treasury will commence its quarterly refunding next Tuesday with a sale of five-year notes, followed by 10-year bonds and 30-year bonds. The difference in yield between the old bond sold in November and the when-issued bond, called the roll, has been wider at the last three auctions (August, November, and the impending auction) than historically. The roll on the 30-year bond is currently 6 basis points, when historically the roll was 2 to 4 basis points. This shift coincided with the evaporation of liquidity in August in all bond markets.
"We still have that preference for liquidity," said Kochan. "It causes people to bid up the price of new bonds relative to the old ones."
Expectations as reported by