Treasuries Fall on Speculation Today's Jobs Report Will Keep Fed on Hold

Treasuries snapped a gain from yesterday on speculation a U.S. employment report today will show the Federal Reserve doesn’t need to reduce borrowing costs.

Notes failed to extend a July advance as Asian stocks climbed, eroding demand for the relative safety of government debt. U.S. job cuts slowed to 65,000 last month from 125,000 in June, economists said. The figures should damp anticipation the Fed may buy bonds to spur growth, said National Australia Bank Ltd. analyst Peter Jolly. The U.S. was losing more than 700,000 positions a month when the central bank announced in March 2009 plans to buy government debt in so-called quantitative easing.

“The economy was in a vastly worse state than now,” said Jolly, Sydney-based head of market research for the investment- banking unit of Australia’s largest lender. “The Fed looks to be quite a way away from doing quantitative easing again. Ultimately, Treasury yields have to head higher.”

The benchmark 10-year yield rose one basis point to 2.91 percent as of 6:51 a.m. in London, according to BGCantor Market Data. The 3.5 percent note due in May 2020 dropped 2/32, or 63 cents per $1,000 face amount, to 104 31/32.

MSCI’s Asia Pacific Index of shares advanced 0.1 percent, erasing an earlier loss of as much as 03 percent.

Treasuries are little changed this month, after rising from April through July, according to indexes compiled by Bank of America Merrill Lynch.

The 10-year yield will climb to 3.24 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weighting. Jolly predicts 3.4 percent.

TED Spread

Yields indicate investors are becoming more willing to lend. The TED spread, the difference between what banks and the U.S. pay to borrow for three months, narrowed to 28 basis points, the least since May.

The three-month London interbank offered rate for dollars, known as Libor, fell for a 17th day yesterday to 0.418 percent.

The central bank should resume purchases of Treasury securities if the economy slows and prices fall, Fed Bank of St. Louis President James Bullard said in a research paper released on July 29.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has narrowed to 1.84 percentage points from this year’s high of 2.49 percentage points in January.

Bond bulls say the pace of economic growth is slow enough that investors will seek government securities.

“The rally has more room to go,” said Hiromasa Nakamura, who helps invest the equivalent of $22.2 billion as a senior investor in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest publicly traded bank. “Today’s number will not be strong. U.S. consumer spending will decline.”

‘Anemic Recovery’

The savings rate for American households increased to 6.4 percent in June, the highest level in a year, according to the Commerce Department.

The U.S. economy faces an “anemic recovery” and the government will need to enact another round of “better designed” stimulus measures, Nobel Prize-winning economist Joseph E. Stiglitz said yesterday in a Bloomberg Television interview in Sydney.

U.S. economic growth slowed to 2.4 percent in the second quarter from 3.7 percent in the first. It will be 2.7 percent in the July-to-September period and 2.8 percent in the last three months of the year, a Bloomberg survey of economists shows.

Fed Rate

The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008 to foster the economic expansion.

Treasuries alternated between gains and losses this week. They rose yesterday as an unexpected increase in initial jobless claims added to speculation the economic recovery is waning.

“The jobless-claims numbers surprised to the downside, which is spurring some bullish momentum in the Treasury market,” said Sergey Bondarchuk, an interest-rate strategist in New York at BNP Paribas SA, one of the 18 primary dealers that trade directly with the Fed. “We are going through a weak patch of data.”

The number of Americans filing first-time claims for unemployment insurance rose to 479,000 in the week ended July 31 from a revised 460,000 in the previous seven days, the Labor Department reported.

Government efforts to spur employment will send 10-year yields higher, according to Geoff Howie, a senior vice president at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options.

President Barack Obama’s plan to double sales of U.S. goods abroad over the next five years will be one of the leading initiatives, Howie wrote in a research note today. His target for the 2020 rate is 3.25 percent, according to the report.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.