Government bonds pull back, extending last week’s selloff

US Treasury bonds pulled back on monday, sending 10-year bond yields to the highest level in nearly two months and extending the biggest weekly price selloff in nearly two months.

Investors are positioning for a solid jobs report due friday. Economists polled by The Wall Street Journal expect 228.000 new jobs were added last month, sharply rebounding from 126.000 in march.

In the meantime, German government bonds remain under selling pressure and the price weakness continues to ripple into US Treasury market.

“We are continuing to react to rising German bund yields,” said Mary Ann Hurley, vice president of trading in Seattle at D.A. Davidson & Co. “The Treasury bond market is also concerned with the labor report.”

In late-afternoon trading, the yield on the benchmark 10-year Treasury note was 2.135%, compared with 2.119% on friday. The 10-year yield rose for a sixth consecutive day and settled at the highest closing level since march 9.

On monday, the yield on the 10-year German bond settled at 0.457%, the highest closing level since january 21. The yield tumbled to a record closing low of 0.07% on april 20.

Traders said the Treasury bond market is vulnerable for more selling if US economic indicators allow the Federal Reserve to potentially raise interest rates sooner than many investors expect.

The 10-year Treasury yield jumped to 2.24% in early march, the highest closing level of the year, after a strong jobs report for february. The yield was 2.173% at the end of 2014. Fed officials said last week at their policy meeting that the first quarter’s sharp slowdown was temporary.

Economists still expect the US economy to regain momentum in the summer, a pattern that was exhibited in the past few years. Many investors expect the Fed to wait until september or later to raise rates. But some officials have warned investors that a rate increase in june isn’t off the table.

A selloff in German government bonds over the past week has rippled through bond markets on both sides of the Atlantic, highlighting investors’ concerns over lofty valuations after a sharp price rally since the start of 2014.

Bond buyers have benefited from a broad decline in interest rates over the past year, driven by an uneven pace of global economic growth, subdued inflation and ultraloose monetary stimulus from the European Central Bank.

Analysts have cautioned that bondholders are vulnerable if sentiment turns sour. Even a moderate rise in bond yields and a corresponding fall in prices could more than offset income from paltry interest payments.

Treasury bonds have been a laggard as the selloff over the past week chipped away returns. The market including bills, notes and bonds has handed investors a total return of 0.74% this year through friday, according to data from Barclays PLC.

Over the same period, Treasury inflation-protected securities have returned 1.69%. US debt sold by lower-rated companies, or junk bonds, have returned 3.78%. The S&P 500 stock index has returned 3.03%. Total return includes price changes and interest or dividend payments.

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