By Ellen Freilich
NEW YORK, Oct 5 (Reuters) - U.S. Treasuries prices fell on Friday after an unexpected drop in the U.S. jobless rate damped bids for safe-haven U.S. debt and reminded investors Federal Reserve monetary stimulus would eventually be scaled back.
The U.S. Labor Department said the unemployment rate fell to a four-year low of 7.8 percent in September as 114,000 jobs were added to nonfarm payrolls.
Analysts saw the first signs of a future pullback in Fed stimulus after the central bank last month said it would pump money into the U.S. economy until it saw a sustained upturn in the weak jobs market.
“Treasuries sank after the jobs report,” said Cary Leahey, economist and senior advisor to Decision Economics in New York. “Though September job growth was close to expectations, several facets of the report, particularly the large drop in the unemployment rate to 7.8 percent, suggested that the Fed was closer to the exit window,” said Leahey, referring to the Federal Reserve’s program of unconventional monetary easing.
“A 7.8 percent unemployment rate is much closer to the 7 percent implicit Fed exit monitoring target than 8.1 percent,” Leahey said, referring to the unemployment level seen as a trigger for the Fed to begin a gradual withdrawal of accomodative policy.
The benchmark 10-year Treasury note, which was down 4/32 in price just before the report was released, extended its loss to 16/32, pushing its yield up to 1.73 percent from 1.67 percent late on Thursday.
The 30-year bond, down 8/32 before the report, fell nearly two points to 96, its yield rising to 2.95 percent from 2.89 percent late on Thursday.
Though he Treasury market retreated following the jobless data, the drop was far from decisive.
Alan Ruskin, head of G10 FX strategy at Deutsche Bank in New York, said the report did nothing to “dent a quantitative easing-fueled moderate ‘risk on’ bias,” and would not change investors’ views on the nature of monetary policy the Federal Reserve would likely conduct next year.
“The data does not suggest things on the ground have changed radically ... (and) will have little impact on entrenched expectations of a very extended period of quantitative easing, at least through 2013,” he said.
“A string of much better employment reports would be needed to change a view that the Fed will be expanding its balance sheet by close to $1 trillion over the next year,” Ruskin said.
That a majority of the jobs that contributed to the drop in the unemployment rate were part-time positions also kept the reaction of financial markets in check.
“Generally, investors are buyers on weakness (when the 10-year note yield rises) to 1.75 percent,” said Tom di Galoma, managing director at Navigate Advisors LLC, a Stamford, Connecticut-based broker-dealer.
Traders attributed some of the downward pressure on 10- and 30-year Treasuries to anticipation of supply next week when the Treasury will auction 10- and 30-year bonds.
“A concession is starting to be built in ahead of the longer end supply next Wednesday and Thursday,” said Cantor Fitzgerald Treasury strategist Justin Lederer.
The difference between 10- and 30-year yields has widened back to slightly more than 122 basis points, he noted.
“Overall, as risk assets trade better and supply looms, Treasuries will give back some of their recent gains. But I do not expect any major sell-off,” Lederer said.
The Federal Reserve sold $7.802 billion in U.S. Treasury coupons maturing from February 2013 to February 2014 as part of its “Operation Twist” stimulus program that extends the average maturity of the central bank’s Treasury holdings in order to lower mortgage rates and other long-term borrowing costs.