U.S. Treasury Yields Rise After Positive Jobs Data -- 2nd Update

By Sebastian Pellejero and Sam Goldfarb

A wave of selling in U.S. government bonds intensified on Thursday, sending yields soaring after new data indicated a strengthening economic recovery and an auction of seven-year Treasurys met with tepid demand from investors.

The yield on the benchmark 10-year Treasury note reached as high as 1.539% before finishing Thursday's session at 1.513%, according to Tradeweb -- its highest level in a year and up from 1.388% at Wednesday's close.

Moves were also pronounced in shorter-dated bonds. The five-year yield rose to 0.799% Thursday from its previous close of 0.612% -- the largest one day gain since December 2010.

Yields, which rise when bond prices fall, climbed after Labor Department data showed that the number of jobless claims fell sharply last week, signaling the job market could be stabilizing after layoffs edged higher earlier in the winter.

Investors tend to sell Treasurys when they expect faster growth and inflation, which lowers the value of bonds' fixed payments and can eventually lead the Federal Reserve to raise short-term interest rates.

Yields rose later in the session following a $62 billion auction of seven-year Treasurys that analysts said showed extremely weak interest from investors.

"The intermediate area of the curve has undergone a truly violent selloff over the last 2 days and the auction results suggest no one has the stomach to try and step in to turn the tide," wrote Jefferies analysts in a note after the auction.

Thursday's move extends a recent climb in government bond yields that has started to capture the attention of investors across a range of asset classes. The yield on the 10-year note, a bellwether for borrowing costs on everything from mortgages to corporate loans, has jumped to more than 1.5% from around 1% in a matter of weeks, lifted by increased expectations that vaccines and government stimulus efforts will accelerate growth and inflation.

While Federal Reserve officials have said the yield's climb toward pre-pandemic levels marks a return to normalcy and isn't problematic, some investors are worried that a pickup inflation could force the central bank to raise interest rates faster than expected, said Gennadiy Goldberg, U.S. rates strategist at TD Securities.

"Right now, it seems as though nobody really wants to buy the dip," he said.

Fed Chairman Jerome Powell told lawmakers this week that while the economy has picked up since the depths of the slowdown, the central bank intends to maintain its easy-money policies until "substantial further progress has been made" toward its employment and inflation goals. The central bank cut interest rates to near zero and committed to buying billions of dollars of bonds to keep U.S. borrowing costs down and help aid the recovery.

Comments from Fed officials that they aren't worried about rising yields have only added to the selling pressure in the bond market, analysts said. For much of last year, investors expressed confidence that the Fed -- in order to support the economy -- would prevent yields from rising much higher than 1% by increasing the amount of longer-term Treasurys that they buy each month. But that confidence has since evaporated, removing a key constraint on rising yields.

Investors "are sort of pouting about it," said Jim Vogel, interest-rates strategist at FHN Financial, referring to the Fed's lack of interest in buying more longer-term Treasurys.

If yields continue to rise, that could pressure stocks and increase borrowing costs for companies and consumers, which some worry could fuel further volatility.

"As rates rise, a lot of the products that used Treasurys as their benchmark tend to rise as well, and that produces natural hedging needs for investors," said Mr. Goldberg.

Write to Sebastian Pellejero at [e-mail] and Sam Goldfarb at [e-mail]

(END) Dow Jones Newswires

02-25-21 1632ET