Treasury yields resume climb as ECB hints at end of monetary easing
U.S. Treasury yields climbed on Thursday, joining a global selloff in government paper, as investors took a cautious stance amid renewed fears that central banks were on the verge of halting easy-money policies.
The yield on the benchmark 10-year Treasury rose 3.6 basis points to 2.369%, its highest levels since May 11. The yield on 30-year bond jumped 5 basis points to 2.905%, its largest single day gain in more than two months.
Whereas, the yield on the shorter two-year note ticked 0.9 basis points lower to 1.406%, compared with 1.414% in the previous session. Bond prices moves inversely to yields and a basis point is equal to one hundredth of a percentage point.
In Europe, bond prices came under selling pressure, pushing yields higher amid a broad selloff in equities , typically perceived as risky assets, and haven government paper. In Germany, benchmark 10-year bonds, known as bunds , rose to their highest level in about 18 months, breaking out of a trading range of 0.50% to 0.15%, which could prove a bearish signal and lead to a further selloff.
The sharp yield move higher was kickstarted by a lackluster auction of French sovereign paper on Thursday, and gained momentum after the release of minutes from the European Central Bank, and comments from Bank of France boss François Villeroy, who said interest rates are set to rise in line a broad recovery seen taking hold in the eurozone.
"In terms of rates, we're headed higher, with growth doing better in Europe and Mario Draghi looking for opportunities to pare back the purchasing of their program, said Charlie Ripley, investment strategist for Allianz Investment Management. "In a market where sentiment was so heavily one sided, we're seeing a bit of an unwind in that. Investors are realizing they should pull back."
Minutes released from the ECB's June policy meeting revealed that Draghi & Co. discussed how to communicate their increasing confidence in the eurozone economy and considered dropping a pledge to accelerate its bond-buying program (http://www.marketwatch.com/story/ecb-considered-abandoning-vow-to-accelerate-qe-2017-07-06).
They follow Wednesday's release of the minutes from the Federal Reserve, which is in the early stages of normalizing U.S. monetary policy, with an account of its recent policy conventions (http://www.marketwatch.com/story/fed-might-start-balance-sheet-drawdown-in-september-fomc-minutes-hint-2017-07-05), emphasizing the bank's desire to raise interest rates at least once more in 2017 and begin the reduction of its $4.5 trillion asset portfolio soon. Based on previous statements from Fed speakers (http://www.marketwatch.com/story/feds-harker-says-plan-to-start-to-shrink-balance-sheet-could-start-in-september-2017-06-21), analysts expect the process to start in September.
But several Fed officials appear divided on the precise timing of its balance-sheet reduction (https://www.wsj.com/articles/fed-officials-ready-to-start-portfolio-wind-down-within-months-1499277737), amid stubbornly low inflation and signs that the U.S. recovery, despite healthy labor-market readings, is on an unsteady footing.
With the shift in central bank stances taking all the attention, the raft of economic data releases in the morning did not move bond yields significantly. U.S. weekly jobless claims rose 4,000 to 248,000 (http://www.marketwatch.com/story/us-jobless-claims-climb-4000-to-248000-2017-07-06), while the trade deficit fell 2.3% in May, narrowing to $46.5 billion in May (http://www.marketwatch.com/story/trade-deficit-drops-23-in-may-but-the-trend-is-no-friend-2017-07-06). The Institute of Supply Management's services index, a snapshot of economic activity in the sector, reported a rise to 57.4 in June from 56.9 in May (http://www.marketwatch.com/story/service-sector-accelerates-in-june-ism-survey-finds-2017-07-06), beating the MarketWatch consensus estimate of 56.5%.
Traders focused on a reading of private-sector employment in the U.S. that indicated employers had added a seasonally-adjusted 153,000 jobs in June, payroll processor ADP said. That was below the 180,000 jobs that a consensus of economists had forecast.
"Already there are talks of a downside surprise given the weak ADP report. Payrolls have been trending positive month-to-month, but the underlying momentum in hiring has slowed markedly over the past few years, eroding the Fed's justification for a further rise in rates," wrote Lindsey Piegza, chief economist for Stifel Fixed Income.
Those reports come ahead of the highly anticipated jobs report on Friday, where investors will be closely following for signs of wage growth beyond the headline figures. Economists polled by MarketWatch are expecting 179,000 jobs to be created in June, with the unemployment rate holding steady at 4.3% and average hourly earnings at 0.3%, compared with 0.2% previously.
But analysts point out using ADP job numbers to forecast the non-farm payrolls figures can go awry. Last month, the divergence between the two numbers was especially stark after the Bureau of Labor revealed the U.S. had added 138,000 new jobs in May even as ADP payrolls had increased to 253,000.
(END) Dow Jones Newswires
July 06, 2017 16:28 ET (20:28 GMT)