October 4, 2018 / 2:47 PM / 2 months ago

TREASURIES-Two-day bond sell-off pushes benchmark yield to 7-year high

 (Adds paragraphs on wage growth, analyst quotes, table)
    By Kate Duguid
    NEW YORK, Oct 4 (Reuters) - The sell-off in U.S. Treasury
bonds that on Wednesday sent yields to multi-year highs
continued overnight, pushing the benchmark 10-year bond yield to
its highest level since May 2011.  
    The yield on the benchmark 10-year note on
Thursday hit a high of 3.232 percent, as strong U.S. economic
data released the day before raised prospects that the nonfarm
payrolls report due out on Friday morning would come in stronger
than expected.  
    The yield on the benchmark 10-year note on Wednesday made
its largest daily jump since the U.S. presidential election in
November 2016, as U.S. service sector activity hit a 21-year
high and ADP private payrolls data for September came in
stronger than expected.
    Of particular interest in Friday's payroll report will be
average hourly earnings. "That sense of the market’s rising
discomfort about inflation risks leads me to expect the wage
inflation reading within the U.S. nonfarm payrolls on Friday
will be critical to the current sell-off," wrote Brian
Daingerfield, macro strategist at NatWest Markets. 
    Expectations for Friday's data may have risen too far.
    "It is possible we'll see some retracement of the recent
sell-off if the data disappoints or even if it doesn't match the
expectation for the potential for a very strong print,
particularly in average hourly earnings," said Jon Hill, U.S.
rates strategist at BMO Capital Markets.  
    An index compiled by the Bank of America Merrill Lynch which
broadly measures Treasury market prices posted its worst one-day
price loss since March 2017 on Wednesday. 
    Trading in the global rates market was three times its
normal volume in the Asian session, which boosted the 30-year
Japanese government bond yield to its highest level
since February 2016, according to research from BMO Capital
Markets. The benchmark German government bond also
rose to its highest since May 2018. 
    "We saw very large overnight volumes during both the Tokyo
and London trading hours, which was a catch-up in foreign
sovereign markets to the very large sell-off in U.S. Treasuries
yesterday," said Hill. 
    The reports on Wednesday are likely to keep the Fed on track
to raise rates again in December and suggest the U.S. central
bank's tightening policy is unlikely to end any time soon. 
    The Fed increased rates last week for the third time this
year. Yields rose further late on Wednesday following a speech
by Fed Chairman Jerome Powell in which he said the U.S. economy
can expand for "quite some time."  
    
      October 4 Thursday 10:21AM New York / 1421 GMT
                               Price                  
 US T BONDS DEC8               138-7/32     -0-9/32   
 10YR TNotes DEC8              118-4/256    -0-28/25  
                                            6         
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             2.1825       2.225     0.002
 Six-month bills               2.3525       2.4137    0.003
 Two-year note                 99-194/256   2.8762    0.016
 Three-year note               99-104/256   2.9617    0.014
 Five-year note                99-62/256    3.0399    0.016
 Seven-year note               99-60/256    3.1228    0.015
 10-year note                  97-116/256   3.1776    0.017
 30-year bond                  93-172/256   3.3362    0.017
                                                      
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
                                            Change    
                                            (bps)     
 U.S. 2-year dollar swap        16.75         0.50    
 spread                                               
 U.S. 3-year dollar swap        15.50         1.00    
 spread                                               
 U.S. 5-year dollar swap        11.25         0.50    
 spread                                               
 U.S. 10-year dollar swap        4.50         0.25    
 spread                                               
 U.S. 30-year dollar swap       -9.00         0.25    
 spread                                               
 

    

    
 (Reporting by Kate Duguid
Editing by Susan Thomas and Nick Zieminski)
  
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