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Treasurys fall on jobless claims drop

January 04, 2010 | CNNMoney.com

Treasury prices fell Thursday after a government report showed that initial jobless claims dropped more than expected last week, signaling a stronger economy and dimming the appeal of bonds as safe havens for investors.

There were 432,000 initial jobless claims filed last week, the lowest level in 17 months and down 22,000 from the previous week, the Labor Department said.

"As the economy strengthens, there's clearly inflationary pressure being built into the system," said Kenneth Naehu, managing director and head of fixed income at Bel Air Investment Advisors.

Treasurys are viewed as safer alternatives to stocks because they are backed by the government and guarantee yields. So amid positive economic news, bond prices typically fall as investors turn to riskier assets.

Wednesday's $32 billion auction, which received bids totaling $86.9 billion in 7-year notes, is also pressuring Treasurys, he said. Prices were mixed Wednesday following the auction.

"The [auction] went well in the headlines, but the weakness in it was from foreign and large institutional investors, so it makes people wonder who's going to buy," said Naehu. "You need demand from foreign investors, so this weakness is not a good sign."

Naehu predicts rates will rise in 2010, but he expects uncertainty in the bond market.

"The key to 2010 is to expect volatility, and anyone not prepared for that is going to be rudely awakened," he said. "There is so much hinging on such little information. We all know the government wants to pull back the stimulus, but no one knows what it's going to look like when the government isn't supporting the markets."

The bond market will close at 2 p.m. ET Thursday and will not open on Friday in observance of New Year's Day.

Bond prices: The benchmark 10-year note was down 13/32 to 96-7/32, and its yield rose to 3.84% from 3.80% Wednesday.

The yield on the 10-year note has dropped by nearly 3% over the past decade, falling from 6.45% on Dec. 31, 1999, according to data compiled by the Federal Reserve. In the past 10 years, the yield fared the best in 2000, with an average yield of 6%.

Bond prices and yields move in opposite directions. A higher yield tends to point to increasing economic optimism and means that fewer investors are relying on the safety of bonds.

The 30-year bond fell 10/32 to 95-28/32, and its yield climbed to 4.63%.

The 2-year note decreased 4/32 to 99-23/32. Its yield was 1.15%.

The yield on the 3-month bill was 0.05%.

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