By Isobel Kennedy

NEW YORK, DEC 7 (MNI) – The Treasury market sold off Friday as a
stronger-than-expected November U.S. jobs report dashed the hopes of the bond

When the headlines hit that nonfarm payrolls rose 146,000, compared to
median estimates of a gain of 95,000, Treasuries gapped lower. The fact that
unemployment dropped to 7.7% from the previous 7.9% also hurt. The 10-year yield
went to 1.634% in a nano second from its on screen bid of 1.581% just before the

The October and September nonfarm were revised down a total of 49.000 but
no one seemed to care. Hours and wages increased suggesting rising incomes and

The payroll composition was as follows: manufacturing fell 7,000,
construction fell 20,000, retail rose 52.600, wholesale rose 13,100, temp
workers rose 18,000, leisure rose 23,000, healthcare rose 20,000 and government
fell 1,000.

Mortgage-backed securities loved the higher Treasury yields and lower
dollar prices. For the past few sessions, buying dried up in that market because
customers were balking at the higher yields.

While the higher yields might cause the mortgage originators to sell some
of the paper already in their pipelines, it also means mortgage rates could
hover around current levels for a while alleviating concerns about more supply.

All the news was not rosy, however, and the Reuters/University of Michigan
preliminary consumer sentiment survey plunged to 74.5 from 82.7 in November.
Current conditions dipped to 89.9 from 90.7 and expectations plunged to 64.6
from 77.6.

Economists at BNP Paribas says in the lower consumer sentiment, “the index
of favorable news heard less unfavorable news heard declined in December, as the
potential implications of the cliff and the fact that damage from Hurricane
Sandy was worse than initially estimated came sharply into focus.”

Sentiment has fallen back to August levels, BNP Paribas says.

Economists at Credit Suisse also blamed the “fiscal cliff infection” for
the lower December consumer sentiment.

Credit Suisse says it is evident “in unemployment expectations hitting a 16
month high. Households expecting more unemployment over the next 12 month surged
to 37% in December from 24% in November. This measures leads initial jobless
claims, but it’s unclear if the expectations become reality. Last year’s debt
ceiling situation caused a similar spike.”

The better jobs number was negative for bonds but the consumer sentiment
shows that fiscal cliff worries are important for the here and now.

As we have said before, the Treasury market cannot go too far in either
direction until this is solved. So for the time being, a loose range on the
10-year note could be 1.55% to 1.65%.

House Speaker John Boehner said Friday there has been no progress made in
the talks. While he said he recently has a nice talk with President Barack
Obama, he blamed the President for wasting another week of deliberations.

Boehner said there were lots of things possible to put revenues on the
table, Obama needs “to take a step” towards the Republicans and that if Obama
was serious he could make a counteroffer. He also said there are talks
continuing behind the scenes on reaching an agreement.

Again, no one is sure if the “happy talk” and the “tough language” that
emanates on occasion from both sides is just the public face of the debate. Both
sides still have to cater to their base probably and no one wants to look like
they are throwing in the towel just yet.

The next key event on the calendar for the financial markets is the Federal
Reserve’s meeting next week, the last for this year.

“The Fed is expected to announce next week that asset purchases will
continue after year-end at their current pace of $85 billion per month, an
expectation we share,” JP Morgan said.

“If this is realized this means that after holding relatively steady for
the past 18 months, cash assets on bank balance sheets will be increasing at
about a $1 trillion annual rate! We expect QE3 and QE4 (or if you prefer QE3.5)
will last for about a year and a half. If labor markets stall, however, there is
certainly a risk that these programs could end up lasting two or three years.”

People may or may not be right about the potential for an asset bubble in
bonds. But it is also true that people have to be invested and they do not have
the luxury of waiting around hoping that higher rates are just around the

Have a wonderful weekend.

NOTE: Talk From the Trenches is a daily compendium of chatter from Treasury
trading rooms, as well as some sister market trading rooms, and is offered as a
gauge of the mood the financial markets. It is not necessarily hard, verified

–MNI New York Bureau; tel: +1 212-669-6434; email:

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