US Treasury bonds plunged more than two points, with yields soaring to their highest level in eight months yesterday, as strong US employment data wiped out what hopes remained of one more interest rate cut.
With equity markets closed in the US, as in the UK and most of Europe, there was no repeat of the 170-point dive when equivalent payroll figures a month ago stoked up fears of resurgent inflation and higher borrowing rates. But both Wall Street and London will be on a high state of alert when trading resumes after the Easter break.
News of an additional 140,000 non-farm jobs created in March - double the 70,000 market forecast - and a smaller than expected downward revision of the huge 705,000 February payroll increase to 624,000, confirmed that the American economy was growing at a healthy pace. The growth would have been even sharper if manufacturing employment had not slumped thanks to a strike at General Motors.
"If the economy keeps growing like this, the Fed is going to worry about rising wages," said Cynthia Latta, an economist at DRI/McGraw Hill. "They certainly are not going to push rates lower."
Worries that the figures might signal a tightening of monetary policy sent the 30-year Treasury bond price skidding to a price of 89.16 from a previous close of 91.10. Its yield soared to 6.82 per cent, the highest level since August last year, up from Thursday's close of 6.67 per cent.
The key 30-year June futures contract suffered an even worse beating, slumping more than two points to crash through what had been a major support level. It fell through the support marker of 110.03 to close at 109.13, down from its previous close of 111.20.
"The January easing by the Fed may turn out to be the last in this cycle," said Kevin Flanagan, economist at Wall Street brokerage firm Dean Witter Reynolds. "I am not ready to talk about tightening but I think the Fed is going to be neutral from here on."
Patrick Dimick, a Treasury analyst at CS First Boston, said the concern was that the March data had pushed the three-month average gain in payrolls to 206,000, a jump from the 142,000 average increase in the fourth quarter of last year. "You have to start considering a Fed tightening," he said.
Although trading was limited yesterday, with the stock market closed and the bond market closing at noon, analysts said the plunge in bond prices was enough to raise expectations of further sharp falls in both stocks and bonds when full trading resumes on Monday.
"Bonds have been absolutely crushed," said Eric Wall, treasury market analyst at MMS International in Chicago. "People will return on Monday and look at the June contract in horror."
"The concern is that when the rest of the market comes back next week, you will probably see rates continue to move higher," added Flanagan.
Some predict the 30-year bond yield will widen to between 7.0 and 7.25 per cent by July. That could spell disaster for stocks, as 7 per cent is considered a key point at which fund managers will start thinking about moving some of their equity holdings to cash and money market investments.Reuse content