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Treasury prices hit by US labour report

January 07, 2007 | Financial Times

Government bond prices tumbled on Friday after a stronger-than-expected report on US labour market conditions caught traders on the back foot.

The fall in US Treasury prices initially brought yields close to where they had started the new year as investors adjusted their outlook for economic growth. The US Labor Department said the US economy created 167,000 new jobs in December and reported an upward revision to November job creation.

Economists’ forecasts had been for a reading of 100,000 and many investors had been betting on an even weaker number. A report by private employment service ADP on Wednesday indicated US private sector employment had fallen in December.

The news produced a rapid sell off in US Treasuries, pushing yields around 10 basis points higher across all maturities. By late afternoon in New York, the market had recovered slightly, leaving the yield on the benchmark 10-year bond 4.8bp higher at 4.66 per cent, after starting the week at 4.70 per cent. The two-year note yield was most sensitive, adding 6.2bp to 4.77 per cent, down from 4.81 per cent at the start of the week.

The payrolls report also prompted investors to adjust their bets in the interest-rate futures markets. Short-term interest rate futures fell, bringing the implied odds of a 25-basis-point cut by the end of the first half of this year to 30 per cent, down from 50 per cent before the data.

The US market moves spilled across the Atlantic. European government bond prices had been firmer ahead of the data, having followed the positive trend from the US for much of this week.

However, the payroll figures saw them stumble instantly and end in the red for the week once again. The two-year Schatz yield was up 2.8bp on the day and the week at 3.918 per cent, while 10-year Bund yields were 4.5bp higher on the day and 2.6bp higher on the week at 3.979 per cent.

UK gilts also suffered in spite of data from the country’s leading mortgage lender showing a surprise fall in house prices in December. Two-year gilt yields hit their highest level since July 2001 after rising 3bp to 5.221 per cent, which was 5.4bp up on the week. Ten-year yields, meanwhile, were 2.9bp higher on the day and 6.6bp up on the week at 4.804 per cent.

The benchmark 10-year Japanese government bond yield was up 0.5bp at 1.720 per cent.

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