U.S. government bonds extended their price declines from a day earlier after the Federal Reserve's statement left the door open for an interest-rate increase as soon as next month.
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Also hurting bond prices: a selloff in German government bonds rippling into the U.S.; optimism toward Friday's nonfarm jobs report forecast to show jobs growth gained momentum; new corporate bond supply; Thursday's report showed a jump in unit labor costs, a measure of inflation.
The selling sent the yield on the benchmark 10-year Treasury note to as high as 2.367%, the highest level in more than three weeks, according to Tradeweb.
In recent trading, the yield was 2.361%, compared with 2.309% Wednesday.
The Fed held its short-term interest rate unchanged Wednesday but signaled that the first-quarter soft patch in the economy may be transitory. Analysts said the rate statement suggests Fed officials are sticking to their plan of raising rates further, following a rise in March.
"The bond market is saying that the Fed is likely on course for a June rate rise," said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP.
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Higher interest rates from the central bank reduce money supply in the broader economy and shrink the value of outstanding bonds.
Fed funds futures, used by investors to place bets on the Fed's interest rate policy, showed 76% odds that the Fed would tighten policy by its June meeting, according to CME Group. The odds were 73% Wednesday and 67% one month ago.
Analysts say the high probability suggests many investors believe the U.S. economy can cope with another moderate increase in the Fed's policy rate. U.S. stocks traded near a record high, reflecting confidence in the U.S. economy and the Fed's tightening plan.
Wednesday's reports showed continued expansion in the service industry and solid jobs growth in the private sector, which offset a report Monday showing a gauge of the manufacturing sector pulled back.
Friday's nonfarm employment report is the key datapoint for investors to gauge the growth outlook. Economists expect the U.S. economy added 188,000 new jobs in April, up from 98,000 in March. Wage inflation, via the average hourly earnings from the jobs report, will also be scrutinized.
A report Thursday showed unit labor costs, a gauge of wage inflation, jumped to 3% during the first quarter of this year, compared with 1.3% during the final quarter of 2016. Inflation erodes bonds' fixed return over time.
A broad retreat in commodities flags some downside risk on inflation. Thursday, U.S. crude oil prices fell to the lowest level since November and extended a selloff since mid-April. Lower energy prices have reduced inflation expectations.
Praveen Korapaty, head of interest rate strategy at Credit Suisse, said a June hike is "far from being a sure bet." Market expectations for the Fed would be adjusted lower if upcoming data prove the Fed wrong on their economic assessment, he said.
A selloff in German government bonds rippled into U.S. Treasurys too. Traders said the selloff in the safe haven markets reflects market optimism over this Sunday's second round of France's presidential race. Emmanuel Macron, pro-European independent candidate, is expected to beat right-wing candidate Marine Le Pen who has called for France's exit out of the eurozone.
The yield on the 10-year German bund rose to 0.388% from 0.329% Tuesday.
New corporate bond issuance also weighed down Treasury debt prices. Apple is among companies that plans to sell new debt following its release of the latest earnings report earlier this week. Firms and banks that underwrite corporate debt sales typically sell Treasurys to hedge against undesired swings in interest rates when they price new debt issuance.
Write to Min Zeng at email@example.com
(END) Dow Jones Newswires
May 04, 2017 11:32 ET (15:32 GMT)