By Min Zeng
Investors sold U.S. government bonds on Friday as a solid jobs
report stirred up anxiety that the Federal Reserve may raise
interest rates in June.
The selling sent the yield on the benchmark 10-year Treasury
note soaring to 2.238%, the highest intraday level since December
26. Yields rise as bond prices fall.
In recent trading, the yield was 2.236%, compared with 2.11% on
Thursday, according to Tradeweb. The move deepened the selloff in
the bond market over the past month, though the yield remains very
low compared with a year ago.
The U.S. economy added 295,000 new jobs last month, the Labor
Department said on Friday. Economists polled by The Wall Street
Journal had expected 240,000. The unemployment rate fell to 5.5% in
February from January's 5.7%.
"The U.S. economy is poised to continue to be on an upward slope
and the Fed is getting closer to raising interest rates," said
Christopher Sullivan, who oversees $2.45 billion as chief
investment officer at the United Nations Federal Credit Union.
"This is going to pressure bond yields to go higher. A rate
increase in June cannot be ruled out."
Fed funds futures, used by investors and traders to place bets
on central bank policy, showed Friday that investors see a 21%
likelihood of a rate increase in June, compared with 16% a day
earlier, according to data from the CME.
The odds of a rate increase at the September Fed meeting were
63% on Friday, compared with 51% on Thursday.
Anxiety over the Fed's rate policy outlook has pushed up the
10-year yield from 1.679% at the end of January. It now trades
above 2.173% at the end of 2014. The yield remains lower compared
with 3.03% at the end of 2013.
Fed Chairwoman Janet Yellen said in late February that the
timing of an interest-rate increase depends on how the economy
performs. U.S. job growth has gained traction over the past year
but inflation remains stubbornly low, which has supported the Fed's
policy of being patient.
The Fed's next policy meeting is scheduled on March 17-18.
Investors will watch closely to see whether the Fed is going to
drop the word "patience" from its statement. Ms. Yellen has said
that a removal of the word doesn't mean a rate increase is
imminent, yet traders say this will be a sign the Fed is moving
closer to tightening.
Tony Crescenzi, senior market strategist at Pacific Investment
Management Co. in Newport Beach, Calif., which has $1.68 trillion
in assets under management, said the jobs report "seals an already
largely closed deal" on the removal of patient from the Fed's next
policy statement, and that "it keeps it on a path to raise interest
rates as early as June depending on data to be released between now
and then."
There were some numbers in the jobs report that may lead
policymakers to be cautious.
Average hourly earnings among private-sector workers rose 3
cents last month to $24.78. Wages were up 2% from a year earlier, a
slightly slower annual gain than January's annual gain of 2.2%. The
figure suggests underlying slack remains in the labor market,
despite an unemployment rate that has fallen from 6.7% a year
earlier.
Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in
New York, said tame wage pressure means the Fed is not going to be
"very aggressive" in raising interest rates, especially at a time
when many other central banks have either cut interest rates or
launched bond-buying programs to support growth.
Many investors say bond yields aren't going to rise
significantly. Investors have been struggling to find bonds that
offer a mix of safety and income in the current low-yield
world.
The European Central Bank has been a big driver in sending
global yields lower. ECB President Mario Draghi on Thursday said
the bank will start buying bonds on Monday, including bonds
yielding below zero, as part of the latest stimulus to combat
deflation risks. The prospect of the ECB as a big buyer coming to
the market has sent many government bonds in the eurozone into the
negative-yield area over the past few months.
Analysts said the ECB's bond purchases will mop up all of the
net issuance of the eurozone's government bond market over the next
12 months, which could send eurozone yields lower still. On Friday,
bond yields in Spain, Italy, Portugal and Ireland all hit record
lows, extending their decline from Thursday.
The yield premium an investor obtained by holding the 10-year
Treasury note instead of a 10-year German government bond was about
1.84 percentage point Friday, the highest level since at least
2000.
A rising dollar adds to the allure of buying U.S. bonds for
foreign investors. The dollar soared to the highest level since
2003 against the euro on Friday.
-- Write to Min Zeng at min.zeng@wsj.com