January 4, 2013 / 9:56 AM / 5 years ago

TREASURIES-Payrolls in focus after Fed minutes lift U.S. yields

LONDON, Jan 4 (Reuters) - Ten-year U.S. Treasury yields struck fresh eight-month highs on Friday after Federal Reserve minutes flagged potential risks of ultra-loose monetary policy and as the market awaited U.S. jobs data.

* Ten-year yields hit their highest since early May at 1.96 percent, and last stood 3.9 basis points higher at 1.95 percent. Two-year yields were up 1.3 bps at 0.28 percent.

* Federal Reserve officials are increasingly concerned about the potential risks of the U.S. central bank’s asset purchases, minutes showed on Thursday, prompting some in the market to position for the possibility of an earlier-than-expected unwinding of ultra-loose monetary policy. The Fed though looked set to continue an open-ended stimulus programme for now.

* Against that backdrop, U.S. payrolls data due later in the day would be of particular importance, especially since the Fed has explicitly tied monetary policy to the unemployment rate, analysts said.

* Payrolls outside the farming sector are expected to have grown by 150,000 last month, according to a Reuters poll of analysts. The jobless rate is seen holding steady at 7.7 percent in December - well above the average rate over the last 60 years of about 6 percent.

* Fed officials say they will keep interest rates near zero until the unemployment rate falls to 6.5 percent for as long as estimates of medium-run inflation do not exceed 2.5 percent.

* “The (Fed) minutes were much more hawkish than expected,” Nick Stamenkovic, bond strategist at RIA Capital Markets said. “Remember that now the time of QE (quantitative easing) is dictated by the employment rate and inflation.”

* Some in the market had raised their forecasts after an upbeat private sector jobs report on Thursday, so the number would have to be particularly strong to trigger a market reaction, he said.

* “We would have to see a rise to 200,000 or above for this Treasury market sell-off to persist and 10-year yields to potentially test 2.00 percent,” Stamenkovic said.

* However, Craig Collins, a trader at Bank of Montreal, said the payrolls number would probably not be enough to push 10-year yields through a key support level of 2.06 percent.

“I don’t see us getting there in the near term,” he said.

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