Treasury prices got crushed today by the December
employment report, but pared their losses over the course of the day on heavy buying interest in the benchmark 30-year bond.
Expectations as reported by
The long bond hugely outperformed shorter-maturity notes, in part because of buying interest. (The
Bank of China
was widely rumored to be the buyer of as much as $2 billion, an amount equal to the average daily volume in the security.) Another reason was that the boffo jobs report -- nonfarm payrolls swelled by 378,000, versus the average forecast of a 212,000 gain -- squelched any remaining hope that the
will cut interest rates during the first quarter. Short-maturity issues trade mainly based on expectations for the fed funds rate, and with the rate now expected to stay at 4.75%, their yields moved further up toward that level.
"The risk is shifting," said Richard Gilhooly, senior bond strategist at
Paribas Capital Markets
. "Clearly there is not going to be a near-term ease unless some emerging-market country blows up. The risk is that the Fed could move back to a tightening bias, and I think the market should address that risk."
Gilhooly thinks the first indication of any change in the Fed's thinking will come in Chairman
next major speech, on the state of the economy, to the
House Ways and Means Committee
on Jan. 20. He expects the two-year note's yield to continue to rise, reaching 4.95%, until that time.
The long bond, which traded down as much as 28/32 at 9:36 a.m. EST, finished the day down 21/32 at 99 22/32, lifting its yield 4 basis points to 5.27%. But the two-year note, which lost as much as 8/32 in the minutes after the jobs report came out at 8:30 a.m., finished down 5/32, boosting its yield 9 basis points to 4.73%. As measured by the difference between the two securities, the yield curve flattened to 56 basis points from 59 on Thursday.
But market analysts said the long bond's outperformance was less important than the five-year note's underperformance. The five-year note typically underperforms when the Treasury market as a whole is headed lower, and along with the 10-year note, it was the worst performer on the day. Its yield rose a dozen basis points, from 4.62% to 4.74%. For most of the last two months, the five-year note has yielded the same or less than the two-year note. Today was the first day since Nov. 17 that it yielded more, an indication that bond traders and investors expect strong economic growth.
"They're basically making sure no security trades below fed funds,"
Treasury market strategist Avram Altaras said. "Just in case the Fed does nothing for the next few months, they're repricing it."
The long bond's outperformance was particularly meaningless, analysts said, because it so radically outperformed its futures contract. At the
Chicago Board of Trade
, the March bond futures contract closed down 1 12/32.
"Typically, on an emotional day like this one, I would have expected the bond to fall much more than it did," Altaras said. The fact that it didn't, he said, possibly indicates that amid the furor over the much-stronger-than-expected employment report, a view prevailed that long-term Treasuries, which trade mainly on inflation expectations, continue to benefit from very small numbers in that department.
Expectations as reported by