US Bond Prices Plunge as Economic Data Improve

U.S. Treasurys prices plunged Friday, after government data showed the U.S. economy created jobs at the fastest pace in nine months in January and a services survey pointed to improving economic momentum.

Employers added 243,000 jobs last month, the most since April, and the unemployment rate dropped to a near three-year low of 8.3 percent.

Debt yields hit session highs after Institute for Supply Management data showed that the U.S. service sector expanded more than expected in January.

“The biggest factor today is still the jobs data, but the ISM was a little bit of a confirmation of the jobs data,” said Lou Brien, market strategist at DRW Trading in Chicago.

Benchmark 10-year notes dropped 1 1/32 in price to yield 1.92 percent, up from 1.82 percent late Thursday and the highest yield since Jan. 27.

Thirty-year bonds plunged more than two full points and were last down 2 23/32 in price to yield 3.12 percent, up from 3.01 percent.

The jobless data was “an unambiguously good number,” said Ira Jersey, interest-rate strategist at Credit Suisse in New York.

That said, there are a number of supportive factors for Treasurys yields and Jersey said he expects 10-year note yields to stay below 2 percent in the coming weeks.

“Even though the employment number was good, you still have a lot of slack in the labor force and we still have well over 8 percent unemployment, so inflation expectations are unlikely to be a significant driver of rates in the very near term,” he said.

Break-even levels on five-year Treasury Inflation Protected Securities, a measure of expected inflation , were little changed at 1.87 percent.

Some of Friday's price action may also be explained by dealers being extremely overweight the debt due to large positions taken last week after the Federal Reserve said it expected to hold rates near zero until late 2014.

According to Jefferies, dealers were long Treasurys by $91 billion on Jan. 25, the second-highest long position on record.

They are likely dumping these positions after the stronger-than-expected payrolls number and ahead of the Treasury's planned $72 billion in new three-year notes, 10-year notes and 30-year bonds supply next week.

“This will make for some interesting auctions next week, especially on the long end,” said DRW's Brien. “I think they will be more difficult now than I was looking for them to be earlier.”

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