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US Treasury prices extend slide before jobs report

The US government’s benchmark borrowing costs remained above 2.6 per cent on Friday as investors anticipated robust US employment data ahead of a likely Federal Reserve interest rate increase next week.

The benchmark 10-year yield — one of the most widely followed interest rates in the global economy — was at 2.61 per cent by early in London, its highest level since December and up from below 2.50 per cent over the past week. European bond yields were also higher with the 10-year gilt yield rising 3 basis points to 1.25 per cent.

Higher bond yields and a sharper drop in oil prices have also pressured equity markets this week. The S&P 500 has fallen 0.8 per cent since Monday, on track for its worst week since the end of December, led by energy shares and the yield-sensitive sectors, real estate and utilities.

Economists expect the US economy generated 190,000 jobs in February, and expectations for the labour market have been heightened since a strong ADP survey of private sector hiring was released on Wednesday.

Markus Allenspach, head of fixed income research at Julius Baer, said the market is positioning itself for a series of interest-rate hikes. “Today’s labour market report is expected to further confirm this outlook with a decent gain in non-farm employment and a rebound in wage growth.”

The Fed is widely expected to tighten monetary policy by another quarter point next week unless Friday’s jobs data prove woeful. But some analysts have begun to warn that if the data are much stronger than expected, this may escalate concerns over a more aggressive rate hiking path, wrongfooting bond investors who still believe the central bank will move slowly.

Anything below 180,000 new jobs might unnerve officials, but “a much stronger report would strengthen the Fed’s bias towards raising interest rates, which could also rattle financial markets”, said Brad McMillan, chief investment officer at Commonwealth Financial Network.

Fed officials have been vocal ahead of their two-day meeting next week, making the case for tightening policy for the third time since the end of the financial crisis.

“Fed speakers have boosted — with lightning speed — the implied probability of a March rate hike,” Mike Schumacher, a senior Wells Fargo strategist, said in a note. “If the Fed does follow through next week, market participants may start to view the tightening as a series of co-ordinated moves . . . akin to, dare we say, a normal cycle.”

Shorter-term Treasury notes, which are particularly sensitive to interest rates, are also under pressure, with the two-year yield ticking up to an eight-year high of 1.38 per cent.

Adding to a sense of an inflection point for the global bond market, European Central Bank president Mario Draghi sounded an unexpectedly optimistic note at the bank’s meeting on Thursday. While the ECB kept interest rates at record lows, Mr Draghi said there was no longer a “sense of urgency” to take further action on monetary stimulus and that policymakers “do not anticipate that it will be necessary to lower rates further”.

Still, benchmark German 10-year Bund yields were only 0.44 per cent, while equivalent maturity Japanese government bonds were just 0.09 per cent as the Bank of Japan remains in monetary easing mode. The US/Japan policy divergence is weighing on the yen, with the dollar on Friday climbing to ¥115.40, its highest in eight weeks.

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