Treasurys fall hard after ECB, payrolls Bonds retrace some part of the massive rally this week

http://www.marketwatch.com/column/bond-report

Aug. 5, 2011, 3:59 p.m. EDT

Treasurys fall hard after ECB, payrolls

Bonds retrace some part of the massive rally this week

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By Deborah Levine, MarketWatch

NEW YORK (MarketWatch) — Treasury prices fell further Friday, pushing yields up after the prior day’s steep drop, as U.S. stocks turned up solidly and reports said the European Central Bank might soon step in to help Italy stave off a crisis in its own bond market.

U.S. bonds were lower earlier after the U.S. said the economy added more jobs in July than analysts had expected, easing fears of a renewed slowdown.

Benchmark 10-year yields are still down by the most this week since August 2009.

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What should the Fed do now?

Investors are mulling whether the Federal Reserve will embark on another round of quantitative easing ahead of next week's meeting. AP photo

“Today’s number reaffirms that maybe we’re not falling into another recessionary environment in the near term,” said Roger Bayston, senior vice president of Franklin Templeton’s fixed income group.

“Uncertainty is still going to be there because the big-picture things are not going away, but today’s number provides a little bit of relief,” he said.

Yields on 10-year notes 10_YEAR +6.88% , which move inversely to prices, rose for the first day in seven, by 15 basis points to 2.55%. Yields traded at 2.46% prior to payrolls and after touching 2.34% in Asian trading – its lowest level since October.

Yields are down from 2.80% a week ago.

Yields on 2-year notes 2_YEAR +9.20%  rose 1 basis point to 0.28%, coming off an all-time low.

Thirty-year bond yields 30_YEAR +5.16%  increased 17 basis points to 3.83%. They also touched their lowest levels since October, before the Federal Reserve officially announced it would conduct a second massive round of bond purchases.

Yields jumped more and stocks improved following reports that the ECB will buy Italian debt in exchange for fiscal reforms in the country – indicating policymakers might be lessening the risk of a spreading sovereign-debt crisis. Read more about Italy.

“If the Italian government were to commit to undertake meaningful structural reforms alongside a constitutional balanced budget amendment, and this was accompanied by the ECB purchasing Italian and Spanish debt, then this would be a significant development,” Barclays Capital economists wrote in a note.

10_YEAR 2.57, +0.17, +6.88%

Yields at lowest since late 2010

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Economic, fiscal worries push U.S. 10-year yields down sharply.

While down slightly in European trading hours, bonds extended declined in U.S. morning trading after the Labor Department said the U.S. added 117,000 jobs in July and the unemployment rate fell slightly to 9.1%. See story on payrolls report.

The numbers diffused some fears that the U.S. may be heading back into a recession, which has sent global markets reeling this week. See more on Treasury rally.

“Pessimism has been overdone and in this regard one must see this report as a good one, especially given the massive rally in rates over the past week,” said Eric Green, chief market economist at TD Securities. “It is not the end of the world; the economy is not slipping into recession, but the labor market is far from healthy.”