* Two-year note yield rises near 3-1/2 month highs
* U.S. jobless claims fell in latest week
* Treasuries on track for 2nd worst year since 1996 -BAML
By Richard Leong
NEW YORK, Dec 26 U.S. benchmark Treasuries
yields edged higher on Thursday, just below their two-year high
of 3 percent, in light trading as most investors stayed out of
the market after the Christmas holiday.
The U.S. bond market reopened after being closed on
Wednesday, while major European markets stayed shut, keeping
volume well below average.
Treasuries yields approached peaks set in September after
the Federal Reserve said last week it will shrink its monthly
purchases of Treasuries and mortgage-backed securities by $10
billion, to $75 billion, in January.
If the 10-year Treasury yield, a benchmark for mortgage
rates and investment returns, were to rise much above 3 percent,
it might be a negative for stocks and other risky assets. A
further rise in bond yields would push up long-term borrowing
costs, taking steam out of the economic recovery - similar to
what happened this past summer, analysts said.
"Other markets will take notice if we establish a foothold
above 3 percent," said Rob Zukowski, senior technical analyst at
4Cast Ltd in New York.
The rise in yields this year has hurt the Treasuries market,
which is on course for its second worst year since 1996,
according to data from Bank of America Merrill Lynch.
Given the thin year-end volume, Zukowski said, the few
investors who have not closed their books for the year are
unlikely to make any big trades even if the 10-year yield strays
above 3 percent.
Investors await the next set of government payrolls figures
and whether they indicate the recent strength in the economy is
sustainable, allowing the Fed to taper further, analysts said.
"The proof in the pudding is the next employment report,"
said Wilmer Stith, who co-manages the Wilmington Broad Market
Bond Fund in Baltimore. "The economy is on a slow simmer."
Moreover, Treasuries prices do not have near daily support
from the Fed's purchases for its third round of quantitative
easing. The U.S. central bank will not resume buying U.S.
government debt until early 2014.
Fed policymakers opted to dial back their bond purchases on
signs of economic improvement although unemployment has remained
relatively high and inflation has been stuck below their 2
The Labor Department said on Thursday first-time filings for
unemployment benefits totaled 338,000 in the week ended Dec. 21,
down from an upwardly revised 380,000 the previous week. The
larger-than-expected decline buttressed the view that the
domestic labor market has further improved, but it was not
enough to support the notion that job growth is speeding up,
boosting economic growth and inflation from current levels.
This latest level of weekly jobless claims has coincided
with monthly job creation rising to the 200,000 area and the
unemployment rate falling to a five-year low of 7.0 percent in
"If we get another month of 200,000-plus in payrolls and the
unemployment rate with a six (percent)-handle, we could see
further deterioration in the 10-year yield," Stith said.
If the upcoming jobs readings disappoint, the 10-year yield
might fall back to 2.75 percent, he added.
The December payrolls data will be released on Jan. 10.
Benchmark 10-year Treasury notes fell 2/32 in
price to yield 2.992 percent, up one basis point from late on
Tuesday. The 10-year yield touched 3 percent overnight,
fractionally below a two-year intraday high set on Sept. 6,
according to Reuters data.
The yield on two-year notes was up one basis
point at 0.415 percent, above its 50-day moving average but
still below the intraday high of 0.538 percent in September.
Thirty-year bonds fell 14/32 in price, yielding
3.921 percent, up 2.1 basis points from late on Tuesday. The
30-year yield was less than seven basis points below the
two-year high, which was set more than three months ago.
Barring a massive rally between now and next Tuesday, the
Treasuries market will suffer its second biggest annual loss in
17 years. The Bank of America Merrill Lynch's Treasuries index
has fallen 3.3 percent year-to-date, which is slightly smaller
than the 3.5 percent drop in 2009.