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Treasuries extend losses after jobs data

January 09, 2007 | Financial Times

US government bond prices moved lower on Monday, extending losses that began after much stronger than expected employment data on Friday dashed investor hopes for an early cut in interest rates this year.

Comments from Michael Moskow, Chicago Federal Reserve president, late on Friday added to the bearish sentiment in bonds.

Referring to Friday’s 167,000 non-farm payrolls reading, he said: “By the old standard, that would be just average but, given the current trends in the labour force, we view such growth as quite solid.”

The employment picture prompted many people to revise their outlook on Fed interest rate policy. Prices for short-term interest rate futures on Monday showed that investors were putting the odds of a March rate cut at nil, down from about 15 per cent before the data.

William O’Donnell, strategist at UBS, said Mr Moskow’s comments suggested that the Fed “may be willing to tolerate a lower threshold of non-farm payroll growth – raising the bar for a rate cut somewhat”.

UBS has pushed back its forecast for the Fed to begin easing rates from March to May.

By late afternoon in New York, the yield on the benchmark 10-year bond was 1.2 basis points higher at 4.658 per cent. The two-year note yield was up 2.5bp at 4.787 per cent.

UK gilt prices made slight gains on Monday in a very thin market with no new data to give direction. The Bank of England’s interest rate-setting committee meets this week and is widely expected to leave rates unchanged at 5 per cent.

There is a growing conviction among both economists and the market that the Bank will raise rates by 25bp some time in the first quarter.

Two-year gilt yields slipped by 0.5bp to 5.216 per cent, their first decline in more than a month, while 10-year yields slipped 1.6bp to 4.788 per cent.

European government bonds also suffered from lacklustre trading and ended the day little changed. The two-year Schatz yield was flat at 3.912 per cent, while the 10-year yield was down 0.1bp at 3.972 per cent.


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