Yields hit highest level in six weeks after jobs data



U.S. Treasury yields rose to their highest levels in six weeks on Friday after job growth rose more than expected in February, which could ease fears of an abrupt slowdown in economic growth and keep the Federal Reserve on track in reducing its monetary stimulus.

Employers added 175,000 jobs to their payrolls last month after creating 129,000 new positions in January, the Labor Department said on Friday. The unemployment rate, however, rose to 6.7 percent from a five-year low of 6.6 percent.

"It was above expectations. Equally important is that it wasn't a repeat of another disappointing number,'' said Michael Materasso, senior vice president and co-chair of the Franklin Templeton fixed income policy committee.

Investors have been struggling to interpret a recent spate of weakening data, including fewer-than-expected jobs gains in December and January, which many see as having been influenced at least in part by bad weather.

Materasso said volatility in data was likely to continue in the near term, but he expects the economy to pick up in the second half of the year, with 10-year notes yields likely rising to around 3.50 percent by the fourth quarter, he said.

Benchmark 10-year notes yields rose as high as 2.82 percent on Friday, the highest level since January 23 and up from 2.73 percent before the data was released. Thirty-year bonds yields were as high as 3.745 percent, from 3.68 percent before the release.

(Read more: Heating up: Job creation accelerates in February)

Gauges of investors' short-term inflation expectations also jumped after the data showed that hourly wages grew 0.4 percent in February, the strongest monthly rise in eight months, suggesting some price pressure in the economy.

The yield spread between five-year Treasury Inflation-Protected Securities and regular five-year Treasuries expanded to 2.01 percent, 3 basis points wider than late Thursday. This was widest five-year TIPS spread since May 15, according to Tradeweb data.

Friday's jobs figure gives some support to the Fed to continue to reduce its monthly bond purchases as long as economic growth remains moderate.

"Fed tapering will likely continue full steam ahead. At the base level it should be negative for bonds, but mildly positive for stocks and the dollar,'' said Craig Dismuke, chief economic strategist at Vining Sparks in Memphis.

Friday's jump in yields was also seen reflecting reticence by investors to buy bonds at recent levels. Many see rates as having been held down by unrest in Turkey and Ukraine and not fully reflecting the U.S. economic outlook.

"Those lower yields were created by distress, once by the Turkey situation at the beginning of February and once by the Ukraine situation at the beginning of this month. Those are not investor levels they are excess levels in the market. Now we are moving back to fair value," said Tom Tucci, head of Treasuries trading at CIBC in New York.

Treasurys may also stay under pressure ahead of new supply next week, when the government will sell $64 billion in new coupon-bearing debt. This will include $30 billion in three-year notes, $21 billion in 10-year notes and $13 billion in 30-year bonds.

—By Reuters