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Treasury bond yields surge despite weak jobs report

February 4, 2011 | 12:09 pm

The January employment report looks weak on the surface, with a net gain of just 36,000 jobs.

But the Treasury bond market on Friday seems convinced that the economic recovery is gaining momentum -- whether or not it’s yet showing up in government payroll data.

Bond yields have surged across the board, breaking out of their recent range to the highest levels since spring.

30yr The 30-year T-bond yield (charted at left) was at 4.73% at about noon PST, up from 4.67% on Thursday and the highest since April 14.

The two-year T-note yield was at 0.76%, up from 0.71% on Thursday and the highest since June.

The latest jump in market interest rates is another blow to current bondholders because it automatically devalues older fixed-income securities. That will show up in falling share prices for many bond mutual funds.

The January employment gain was limited by storms in the Midwest and East. Economists at brokerage UBS in New York figure 150,000 more jobs would have been added if not for the weather factor.

Still, many analysts were disappointed with the guts of the report. Given strength in other economic data in recent weeks, job growth remains the missing link in this economic recovery.

But the sell-off in bonds shows that many investors and traders are betting that payrolls will continue to improve in the next few months, underpinning the recovery, said Gary Pollack, head of bond trading at Deutsche Bank Private Wealth Management in New York.

If growth is sustained, investors expect that the general trend in longer-term interest rates will be up --  which is the direction they’ve been heading since bottoming last fall.

Pollack also noted another reason why yields were rising Friday: The government will sell a total of $72 billion in three-, 10- and 30-year bonds next week. It’s typical for the market to sell off ahead of bond sales as dealers lighten up before the new supply hits the market.

The latest jump in bond yields shows the limits of the Federal Reserve’s power to keep longer-term interest rates subdued with its huge Treasury-buying program.

Fed Chairman Ben S. Bernanke reiterated on Thursday that the central bank wasn’t ready to curtail that program because he believed that the economy needed more stimulus. But the Fed risks fanning inflation concerns if it continues to pump money into the financial system and growth accelerates.

Inflation is the bond owner’s enemy because it erodes fixed returns. To compensate for inflation risk investors demand higher yields to buy bonds -- which must partly explain what’s happening in the market now.

-- Tom Petruno