TREASURIES-Yields soar as U.S. jobs data stokes Fed fears
* Analysts see Fed buying fewer bonds likely as of September
* Benchmark yield on track for biggest one-day rise in two years
* Mortgage bonds trail Treasuries on Fed tapering worries
* U.S. 30-year swap spread turns positive for 1st time since 2009
NEW YORK, July 5 (Reuters) - Yields on U.S. Treasuries hit multiyear highs on Friday after a surprisingly strong monthly jobs report added to speculation that the Federal Reserve will soon slow its massive bond-buying program, which has flooded global markets with money this year. The sharp selloff in Treasuries accelerated losses that started in May, when Fed Chairman Ben Bernanke began hinting that the U.S. central bank was eyeing the finish line. But the steady trickle of selling has recently become a stampede, with bond funds and big investors among the hardest hit. The benchmark 10-year Treasury note's yield has been driven sharply higher by the expectations that the Fed will reduce its monthly buying - rising from 1.60 percent to above 2.70 percent. That spike caught many investors with bad positions and smaller investors have fled. Data from Lipper shows almost $24 billion in outflows from bond funds in the last four weeks. There are also signs that traders expect longer-term borrowing costs for corporations to outpace those of the federal government, a sign of normalcy not seen in more than four years. A Labor Department report showing U.S. employers added 195,000 jobs in June fueled the selloff. The healthier the labor market gets, the likelier U.S. policymakers are to find the economy can stand on its own, without the help of the Fed.
"These numbers should support the notion the Fed might at least announce its plan to taper in September," said Mike Cullinane, head of Treasuries trading at D.A. Davidson in St. Petersburg, Florida. U.S. 10-year Treasury notes last traded 1-25/32 lower in price to yield 2.717 percent, up more than 20 basis points on the day for its biggest one-day yield rise in about two years. Most primary dealers in a Reuters poll now see the Fed pulling back on its bond purchases in September, with Goldman Sachs and J.P. Morgan both citing the jobs report as a factor in bringing forward their outlooks. Heavyweight investors and bond funds have gotten hit in the rush for the exit. PIMCO Total Return fund, the world's largest bond fund, suffered record outflows of $9.6 billion in June, its second straight month of withdrawals. Rates futures, meanwhile, implied traders expected the Fed to hike interest rates in late 2014.
"I think from here going forward, buybacks and strength in the market will be a selling opportunity," said Dan Mulholland, managing director in Treasuries trading at BNY Mellon in New York. New supply next week may add to weakness in Treasury debt prices, while investors will also focus on the release of minutes from the Fed's June meeting on Wednesday, traders said. The U.S. Treasury will sell $32 billion in three-year notes on Tuesday, $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday. Mortgage bonds suffered heavy losses as well on anxiety that the Fed would buy fewer of them. Thirty-year, 3.0-percent coupon MBS backed by mortgages guaranteed by Fannie Mae fell 2 points for a yield of 3.95 percent, up 42 basis points from late Wednesday. The U.S. interest rate swap sector signaled that investors were prepared for reduced Fed support in an improving economy. The interest rate on 30-year dollar swaps briefly traded above the yield on 30-year Treasury bonds. The spread between the 30-year swap rate and the 30-year bond yield was briefly positive. This hinted traders see long-term private borrowing costs rising faster than those for the federal government as a stronger economy boosts tax receipts and cuts the debt the government needs to issue, analysts said. The 30-year swap spread traded as wide as 1.25 basis points shortly after the jobs data, a level not seen in 4-1/2 years, before slipping back into negative territory late morning. In addition, the yield spreads between Treasury Inflation Protected Securities (TIPS) and regular Treasuries have rebounded since late June, when they contracted due to weak inflation data and worries about less Fed buying. The spread between 10-year TIPS and Treasury yields - or the 10-year breakeven rate, which the Fed monitors as a gauge of investors' long-term inflation expectations - moved to 2.07 percent, 3 basis points wider from late on Wednesday.