Bonds: Treasury yields rise ahead of US jobs data

These were the movements in some of the most widely followed 10-year sovereign bond yields:

US: 2.79% (+8bp)

UK: 1.53% (+2bp)

Germany: 0.71% (+2bp)

France: 0.97% (+1bp)

Spain: 1.40% (-2bp)

Italy: 1.95% (-7bp)

Portugal: 1.92% (-2bp)

Greece: 3.64% (-4bp)

Japan: 0.08% (+0bp)

The yield on the UK 10-year gilt advanced two basis points to 1.53% on Thursday.

Meanwhile, broad-based weakness in the US dollar sent Cable to $1.4278.

Thursday’s purchasing managers' index data showed that the expansion in UK’s manufacturing activity unexpectedly slowed in January from 56.2 to 55.3. Analysts' forecast was for 56.5.

UK construction PMI data is due on Friday. January figure may have eased to 52.0 according to the consensus of analyst expectations, from 52.2 printed a month earlier.

“Recent events in the construction sector point to some of the problems afflicting the UK as Carillion’s problems will testify” according to Michael Hewson, chief market analyst at CMC Markets. “This means that for the first part of 2018 construction is likely to be a drag on the UK economy, something that is likely to be borne out by this week’s construction PMI data”.

In the eurozone, core sovereign bond yields rose slightly, while peripheral yields fell on Thursday. German 10-year yield increased 2bps to 1.71%, a two-year high. French 10-year yield hit 1% for the first time since March 2017, and closed the session 1bp higher at 0.97%. Italian 10-year yield fell 7bps to 1.95%, as Spanish 10-year yield retreated 2bps to 1.40%.

The spread between the Spanish and German 10-year bonds fell to 68bps, the lowest since April 2010. Meanwhile, the 10-year Italian-German yield spread narrowed to 124bps, the lowest since September 2016.

France sold EUR3.621 billion 0.75% 2028 bonds at an average yield of 0.98% on Thursday.

Germany will issue EUR3bn of 10-year Bund on 7 February.

On the data front, the eurozone final manufacturing PMI was in line with the expectation of 59.6 in January. French and Italian data surprised on the upside, while Spanish figure was a touch lower-than-expected.

The euro advanced to $1.2522 against a broadly weaker US dollar.

Investors will be watching the US jobs data on Friday. The US economy is expected to have added 180,000 new non-farm jobs in January, up from 148,000 printed a month earlier. The US unemployment rate is seen unchanged at 4.1%.

“NFPs are not quite the blockbuster event that they once were,” wrote Chris Beauchamp, market analyst at IG. “The main reason for continuing to watch NFPs remains the influence they will have on the Federal Reserve (Fed)”.

“Since the jobs recovery is done and dusted, it is the wage figure that should bear watching. A tighter labour market should prompt wage increases, although that has yet to filter through, it seems,” Beauchamp observed.

Forecasts hint that the average hourly wages growth may have deteriorated to 0.2% month-on-month, versus 0.3% previously.

The long-end of the US yield curve rose further, as some investors took profits on curve-flattening bets ahead of the jobs data. The US 10-year yield advanced 8bps to 2.79%, a fresh four-year high on Thursday. The 30-year yield advanced 9bps to 3.02%, the highest since May 2017.

In the short-end, the US 2-year yield rose less than a basis point to 2.1690%, as the 5-year yield rose 2bps to 2.57%.

Mike Lorizio, head of Treasuries trading at Manulife Asset Management, said the curve-flattening move should continue once the profit-taking is behind, adding that "further flattening of the curve seems inevitable with the supply coming and more Fed rate hikes".

At its January meeting, the Federal Open Market Committee said it “expects that economic conditions will evolve in a manner that will warrant further gradual increases in the federal funds rate”. The Fed is expected to raise rates three times in 2018. The next Fed rate hike is felt to be highly likely to happen in March.

By Ipek Ozkardeskaya