Treasuries Dive on Robust Jobs Report

Fri Nov 5, 2004
By Pedro Nicolaci da Costa

NEW YORK (Reuters) - U.S. Treasury prices slid on Friday as analysts said the first truly robust jobs report in months suggested the Federal Reserve had plenty of reason to keep raising interest rates through the end of the year.

Combined with upward revisions to the prior two months, the 337,000-strong increase in U.S. payrolls seemed to clear a major hurdle for monetary tightening.

It also altered analysts' overall perception of the U.S. economy, which had been marred in the recent past by the recovery's apparent inability to generate employment.

The market had already largely priced in a November interest rate hike, but many were now also growing convinced that the U.S. central bank would tighten further in December.

"This now puts the Fed in play for December, but they have the luxury of another payroll report before then," said Carey Leahey, senior U.S. economist at Deutsche Bank.

Interest rate futures (0#FF:: Quote, Profile, Research) plunged to reflect a greater risk of a move in December, and the possibility that the central bank might continue raising rates in 2005.

The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) dropped 29/32 lower in price. Yields rose to 4.17 percent from 4.08 percent late Thursday but shied away from testing the next major chart barrier around 4.25 percent.

The prospect of higher overnight rates meant short-term yields looked far too low at 2.60 percent and they duly rose sharply. The two-year note (US2YT=RR: Quote, Profile, Research) tumbled 9/32 in price, sending yields up to 2.77 percent from 2.63 late Thursday.

That was the biggest single-day jump in yields since early May, when a strong April payrolls report also caught the market by surprise.

JOBS, FINALLY

Employers added to payrolls in October at the fastest clip in seven months, spurred by rebuilding in the hurricane-hit Southeast and brisk hiring in service industries.

The robust revival in job creation was twice as strong as Wall Street analysts had forecast, and for optimists was a vindication of many months of predicted rebounds that had failed to materialize.

Not only was October a strong month for hiring but the number of jobs created in the two prior months was revised up -- to 139,000 in September instead of 96,000 and to 198,000 in August instead of 128,000.

Those revisions were the last thing bond bulls wanted to hear, and helped sink five-year notes (US5YT=RR: Quote, Profile, Research) 18/32, taking yields to 3.47 percent from 3.35 percent. The 30-year bond (US30YT=RR: Quote, Profile, Research) shed 1-9/32, sending yields flying to 4.90 percent from 4.82 percent.

Despite the solid job creation, the national unemployment rate edged up to 5.5 percent as Americans streamed back into the labor market in search of work.

Bonds were also pressured by equities as the S&P 500 broke an important trendline barrier and threatened to end 10 months of deadlock with a new bull run.

At the same time, crude oil futures (CLc1: Quote, Profile, Research) breached key support around $48.70 a barrel in a pullback that could mark the end of its year-long uptrend.

If it does, energy costs might prove less of a burden on the economy and could give the Fed room to keep raising rates. In the afternoon, oil moved back up to $49.61 a barrel.

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