MW: Small gains for Treasurys as jobless rate unexpectedly drops
By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) -- Treasury prices pared gains Friday, pushing yields down slightly, after a pivotal government report showed the U.S. unemployment rate unexpectedly declined last month to 9.7%.
Treasurys had been up before the data, extending a rally that began on Thursday amid heightening fears about credit risks in some European countries that had the effect of increasing demand for the relative safe haven of U.S. government debt.
"There is contagion fear of what's going on in the periphery of Europe, and that can have a directional impact on sentiment and risk appetite and inspire some flight-to-quality buying," said Derrick Wulf, bond portfolio manager at Dwight Asset Management.
Yields on 2-year Treasury notes (UST2YR 0.76, -0.04, -4.38%) fell 3 basis points to 0.78%, off the session lows that pushed prices higher. Bond prices move inversely to their yields; a basis point is 0.01%.
Yields on benchmark 10-year notes (UST10Y 3.59, -0.02, -0.53%) were little changed at 3.61%, stabilizing after having been lower before the jobs report.
While the Labor Department's estimate pegged the unemployment rate at 9.7% for January, economists had expected that the rate would remain equal with December's 10% rate. Read more on the employment report for January and econmists' reactions.
The report also said the economy shed 20,000 nonfarm-payroll jobs last month, while economists had expected a modest expansion in payrolls.
"There is plenty of information for both camps to grab a hold of here," Wulf said. "I'd characterize it as a confirmation of ongoing improvement in the labor market."
"We take no great economic solace from this but neither do we see this as reason to spark much more of a rally than we've seen coming into the report," said strategists at CRT Capital Group.
Meanwhile, overshadowing the positive statistics for the U.S economy, worries about fiscal imbalances in Spain and Portugal -- in addition to Greece -- kept some investors parked in Treasurys. See more on Spain, Portugal credit worries.
On another front, interest-rate futures traders added to bets that the Federal Reserve would increase federal funds, its benchmark interest rate, by September. The fed-funds rate, the central bank's overnight target rate for loans between banks, has remained at a range of zero to 0.25% for more than a year.
Fed-fund futures showed traders see a 40% chance that the central bank will raise interest rates to 0.5% by September, lower than before the report.
Futures for December indicate a 68% expectation that rates will rise by 75 basis points, or 0.75%, by the end of the year, also a little lower than before the January jobs data came out.
