Treasurys Tumble After July Jobs Report Signals Wage Inflation
AUG 06,1999
NEW YORK -(Dow Jones)- Treasurys sold off quickly Friday morning after a
larger-than-expected rise in July payrolls growth and hourly earnings erased
the previous session's "flight-to-quality" gains. The market had climbed
Thursday as turmoil in other fixed-income markets boosted the allure of
government bonds and sparked speculation that the Federal Reserve might delay a
further rate increase to avoid adding to the market's concerns, but Friday's
jobs report may have dashed those hopes.
Shortly after 8:45 a.m. EDT, the yield on the bellwether 30-year Treasury
bond was at 6.114%, up from 6.037% late Thursday. The bond's price - which
moves inversely to the yield - was down 29/32 at 88 8/32. The bond had jumped
23/32 Thursday.
Among other Treasury issues Friday, the 10-year note was down 23/32 at 96
18/32 to yield 5.97%. The two-year note was down 5/32 at 99 26/32 to yield
5.60%. Three-month bills were up five basis points at 4.64 to yield 4.76%.
Nonfarm payrolls jumped 310,000 in July as wages climbed six cents, or 0.5%,
to $13.29, the biggest rise in average hourly earnings in seven months. Both
numbers exceeded Wall Street expectations. The median estimate of 20 economists
surveyed by Dow Jones Newswires and CNBC had called for payrolls to rise
200,000. Many economists predicted average hourly earnings would rise just
0.3%.
Amid the growth in wages and payrolls, the unemployment rate held steady at
4.3%, but the labor force participation rate remained at an all-time high of
67%, indicating no expansion in the pool of available workers.
The manufacturing sector created jobs for the first time since August 1998.
Factory payrolls grew by 31,000 in July after a 36,000 drop in June.
Most of the overall job growth was generated by the service producing
sector, which added 260,000 jobs in July. Retail trade jobs rose by 91,000, the
fourth straight month of increases.
The July jobs data followed Thursday's report that U.S. productivity growth
decelerated in the second quarter to a 1.3% annual rate - its smallest increase
since the second quarter of 1998 - while labor costs rose at their fastest clip
since the fourth quarter of 1997.
Fed Chairman Alan Greenspan last month warned Congress that falling
productivity "will translate directly into a more-rapid rate of increase in
unit labor costs, heightening the pressure on firms to raise the prices of the
goods and services they sell." He also vowed to act "promptly and forcefully"
to combat such inflationary pressures, interpreted by the markets to mean a
further increase in interest rates.
On Thursday, investors had sought the relative safety of government debt,
particularly short-term debt, as interest-rate-swap products and corporate
bonds abruptly lost value relative to Treasurys in choppy trading.
Behind the decline in those markets were rumors of financial problems at
swap dealers, investment banks and other financial institutions. As a result,
investors closed out positions involving those products and bought back
Treasurys.
The Wall Street Journal reported Friday that some of the nervousness
involved possible losses by investors who have been betting that yields on
British government securities, or gilts, would converge with those on
lower-yielding German government euro-denominated securities, or Bunds. Such
investors have assumed that Britain will eventually join the European economic
and monetary union and British bond yields would fall to those of the 11
euro-zone nations.
The volatility "fueled the sense of, 'there's something going on but I don't
know what it is, so I'll buy Treasurys,'" said David Ging, Treasury market
strategist at Donaldson, Lufkin & Jenrette Securities Corp. in New York. "There
was a lot of fears driving the market today."
As Treasurys outperformed other types of bonds, the difference in yields -
or spreads - between them widened dramatically, sparking concern and prompting
more flows into Treasurys. By late Thursday, spreads between Treasurys and
corporate bonds were about five basis points wider than late Wednesday,
according to traders.
A driving force behind the widening credit spreads was expectations of
reduced supply of Treasurys and increasing supply of other products. In a rare
move, the Treasury Department said Wednesday it will reduce the supply of
long-term bonds and may buy back some outstanding debt with the budget surplus.
Meanwhile, corporations are rushing to issue bonds during the third quarter
in order to alleviate the effects of a possible computer glitch associated with
the turn of the century.
"Treasury is cutting debt and everybody else in the world is increasing
debt," noted one trader.
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