Treasury 10-year tes drop, yield curve steepens on jobs gain

New York: Treasury 10-year notes and 30-year bonds dropped for a second week for the first time since April as a bigger-than-forecast gain in company payrolls eased concern the US economy was falling into another recession.

The difference between 10- and 2-year note yields increased this week to the widest level in three weeks as traders reduced speculation that the US Federal Reserve will provide additional economic stimulus. The 10-year note yield had its biggest three- day gain since December before next week's $67 billion (Dh246 billion) auctions of 3-, 10- and 30-year debt.

"The market was priced for weak data, and the data was biased to the better side," said John Spinello, chief technical strategist in New York at Jefferies Group, one of the 18 primary dealers that trade directly with the Fed.

"A 2.5 per cent yield on the 10-year was not warranted if the data was going to get less negative."

The yield on the benchmark 10-year note increased this week 5 basis points, or 0.05 percentage point, to 2.7 per cent, according to BGCantor Market Data. The price of the 2.625 per cent security maturing in August 2020 dropped 14/32, or $4.38 per $1,000 face amount, to 99 11/32.

The 10-year note yield climbed 22 basis points over the past three days, the most on a closing basis since December 22, when it had a three-day gain of 28 basis points following evidence of a recovery in housing.

The yield dropped on August 25 to 2.4158 per cent, the lowest level since January 2009.

"The moment of truth is now at hand," George Davis, chief technical analyst in Toronto at the primary dealer Royal Bank of Canada, wrote in a note to clients on Friday. A daily close above 2.75 per cent would generate a "full-blown bearish trend reversal" for 10-year notes, according to Davis.

The 30-year bond yield increased 7 basis points to 3.78 per cent after falling on August 25 to 3.4616 per cent, the lowest level since March 2009. The yields on 10-year notes and 30-year bonds rose for two straight weeks for the first time since April 2, when the government's payrolls report showed employers added the most jobs in three years.

Shorter-term Treasuries rose this week as investors remained convinced that the Fed would hold its target lending rate at zero to 0.25 per cent through the first half of 2011. The 2-year note yield dropped 4 basis points this week to 0.51 per cent. It fell on August 24 to the record low of 0.4542 per cent.

The extra yield investors demand to hold 10-year notes over 2-year debt rose last week for the first time since the five days ended July 23, touching 2.25 percentage points, indicating the steepest Treasury yield curve on an intraday basis since August 11.