US Treasury debt prices fell on Friday as investors revived bets that the Federal Reserve could slow its massive bond-buying program later this year after data showed solid if not exceptional employment growth. The yield on the benchmark 10-year note rose for a sixth straight week, the first such gain since late March to early May 2009 when the US economy was bleeding hundreds of thousands of jobs a month during the depths of the recession.
US payrolls rose by 175,000 in May, Labour Department data showed on Friday, more than the 170,000 expected in a Reuters poll but still not enough to suggest an immediate Fed exit from its buying of $85 billion per month in Treasuries and mortgage-backed securities. Still, analysts said the number was strong enough that a slowdown in Fed buying could be on tap in coming months as the economy proves resilient enough to stand without this support.
“Our expectation would be that you still could have the Fed – starting in and around September – very moderately reduce the scale of their long-term asset purchase program, which generally has been the expectation of the markets,” Rick Rieder, co-head of Americas fixed-income at BlackRock, the world’s largest asset manager, said in New York after the jobs data. But at least one Fed official made clear that he thinks the central bank should already hit the brakes.
Philadelphia Fed President Charles Plosser, a longtime critic of the Fed’s quantitative easing program, told Reuters Friday’s jobs report showed that government spending cuts have not so far been as damaging as some had feared. Still, at 7.6 percent, the US unemployment rate remains above the 6.5 percent the Fed would like to see. And with economic growth sluggish – 2.4 percent in the first quarter – some economists still see a place for the current level of Fed accommodation.
Fed policymakers next meet on June 18-19. In the meantime, the selling in Treasuries was compounded by investors closing Treasuries hedges on their mortgage-backed securities holdings. Any reduction in the US central bank’s third round of quantitative easing, dubbed QE3, will likely increase mortgage rates and slow refinancing, reducing the appeal of mortgage bonds, analysts said.