By Sam Goldfarb and Paul J. Davies 

Yields on U.S. government bonds swung sharply Friday after new data showed a big jump in employment in February, creating more optimism about the economic outlook and debate about the path of interest rates.

In recent trading, the yield on the benchmark 10-year U.S. Treasury note was 1.559%, according to Tradeweb. That was down from 1.626% right after the report but still up from 1.547% Thursday.

Yields, which rise when bond prices fall, have been surging for weeks based largely on investors' hopes for the near future, when vaccines may have tamed the coronavirus pandemic even as the government continues to pump money into the economy with various stimulus programs.

Some solid economic data, though, has also helped -- the latest coming Friday, when the Labor Department said that the economy added 379,000 jobs in February, much more than economists had anticipated.

Friday's move also comes a day after Fed Chairman Jerome Powell made his own contribution to the selling in the bond market.

Appearing at The Wall Street Journal Jobs Summit, Mr. Powell said the recent increase in Treasury yields had caught his attention and suggested the Fed might intervene if overall financial conditions tighten much further. But he didn't signal that the Fed was anywhere close to buying more long-term Treasurys each month in an effort to contain yields, as some investors had thought was possible.

Mr. Powell has repeatedly said that the central bank will take a more patient approach to tightening monetary policy than it has in the past, indicating it won't raise rates until inflation can be sustained at or above its 2% target and a range statistics indicate that the labor market is at maximum strength.

Many investors, though, don't seem to fully believe or understand the Fed's new policy, creating a challenge for the central bank as yields rise.

"The problem the Fed has now is that the bond market is clearly confused, " said Hugh Gimber, a strategist at J.P. Morgan Asset Management.

He also said that the central bank will maintain ultralow interest rates until its employment and inflation goals have been met and that it is unlikely that the Fed's goal of maximum employment will be reached this year.

Despite the sharp increase in Treasury yields, many analysts say the Fed isn't likely to intervene in the market unless there is more severe selling in riskier assets, such as stocks and corporate bonds. Those play critical roles in determining the cost of raising money for businesses and influencing sentiment.

Some analysts say there are important factors beyond the economic outlook that are driving yields higher. One is the sheer volume of new Treasurys that enter the market each month as the government funds its efforts to fight the pandemic.

Another is uncertainty over whether the Fed will extend an exemption allowing banks to hold less capital compared with the size of their balance sheets, which is set to expire at the end of the month.

The exemption enables large banks to exclude their holdings of Treasurys and central bank reserves when working out how much capital they need to meet a standard known as the supplementary leverage ratio. The banks will need more capital to hit the same ratio levels if the exemption is allowed to expire, and analysts say they might do that by selling Treasurys.

Trend-following hedge funds have also contributed to the sharp increase in yields. Such funds have placed their largest bets against Treasurys since late 2016, according to David Bieber, quantitative analyst at Citigroup, having added to their positions significantly since last week's volatility.

This increase in bets on rising yields in futures markets has been accompanied by heavy selling of Treasurys among other leveraged investors in so-called risk parity funds, which balance stock and bond investments depending on market volatility.

But these extreme moves in investment positioning could mean yields are primed to fall back again as soon as these two important sources of Treasury demand decide yields have risen enough and so unwind their positions.

"When leveraged, trend-following funds have had very extreme short positions in rates going back to 1990, there has been a rally in rates -- which means falling yields -- in the period after," Mr. Bieber said.

Caitlin Ostroff contributed to this article.

Write to Sam Goldfarb at and Paul J. Davies at


(END) Dow Jones Newswires

March 05, 2021 13:07 ET (18:07 GMT)

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