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Treasury prices whipsaw as market awaits jobs data

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U.S. Treasurys turned flat as investors sought out lower risk debt for month-end rebalancing. U.S. government debt has weakened since gross domestic product data on Wednesday showed a strong rebound in the second quarter from a weak start to the year.

That extended into Thursday morning as data showed U.S. labor costs recorded their largest increase in more than 5-1/2 years in the second quarter, a sign that a long-awaited acceleration in wage growth was imminent.

The debt stabilized, however, as some investors shifted out of stocks and into bonds to adjust month-end balance sheets. "There is some month-end buying, both here and in Europe," said Dan Mulholland, managing director in Treasuries trading at BNY Mellon in New York.

Treasurys also pared losses after a report showed the pace of business activity in the U.S. Midwest in July sank to its slowest level since June 2013.

Benchmark 10-year notes were unchanged in price, yielding 2.56 percent, after earlier rising as high as 2.61 percent, the highest since July 8. 30-year bonds, meanwhile dropped 7/32 in price to yield 3.33 percent.

Rising labor costs earlier on Thursday led some investors to see a greater likelihood the Federal Reserve will increase interest rates next year, while others fear that higher inflation is likely if the U.S. central bank is too slow to act. "In general, you have decent data and if the Fed's behind the curve, you will wind up with inflation running a little bit higher than people thought," said Ira Jersey, an interest rate strategist at Credit Suisse in New York.

The Fed acknowledged firmer prices and improving data on Wednesday but also expressed concern about remaining slack in the labor market.

The yield curve steepened as investors adjusted to the prospect of higher inflation. The yield gap between five-year notes and 30-year bonds steepened to 156 basis points, up from a five-year low of 149 basis points on Wednesday.

A Morgan Stanley index meant to gauge the timing of the first interest rate hike (M1KE) on Wednesday suggested that an increase may occur within 12 months, the first time since 2011 that the index has indicated one will occur within a year, an analyst at the bank said in a report on Wednesday.

Based on this indicator, two-year note yields should pay 0.68 percent, the bank added. That is 12 basis points higher than the notes' current yield of 0.56 percent. The next major focus will be Friday's jobs report for July. Employers are expected to have added 233,000 jobs in the month, according to the median estimate of 100 economists polled by Reuters.


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