Treasury 10-Year Notes Decline, Yield Curve Steepens on Increase in Jobs
Treasury 10-year notes and 30-year bonds dropped for a second week for the first time since April as a bigger-than-forecast gain in company payrolls eased concern the U.S. economy was falling into another recession.
The difference between 10- and 2-year note yields increased this week to the widest level in three weeks as traders reduced speculation that the Federal Reserve will provide additional economic stimulus. The 10-year note yield had its biggest three- day gain since December before next week’s $67 billion auctions of 3-, 10- and 30-year debt.
“The market was priced for weak data, and the data was biased to the better side,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., one of the 18 primary dealers that trade directly with the Fed. “A 2.5 percent yield on the 10-year was not warranted if the data was going to get less negative.”
The yield on the benchmark 10-year note increased this week 5 basis points, or 0.05 percentage point, to 2.7 percent, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 dropped 14/32, or $4.38 per $1,000 face amount, to 99 11/32.
The 10-year note yield climbed 22 basis points over the past three days, the most on a closing basis since Dec. 22, when it had a three-day gain of 28 basis points following evidence of a recovery in housing. The yield dropped on Aug. 25 to 2.4158 percent, the lowest level since January 2009.
‘Moment of Truth’
“The moment of truth is now at hand,” George Davis, chief technical analyst in Toronto at the primary dealer Royal Bank of Canada, wrote in a note to clients yesterday. A daily close above 2.75 percent would generate a “full-blown bearish trend reversal” for 10-year notes, according to Davis.
The 30-year bond yield increased 7 basis points to 3.78 percent after falling on Aug. 25 to 3.4616 percent, the lowest level since March 2009. The yields on 10-year notes and 30-year bonds rose for two straight weeks for the first time since April 2, when the government’s payrolls report showed employers added the most jobs in three years.
Shorter-term Treasuries rose this week as investors remained convinced that the Fed would hold its target lending rate at zero to 0.25 percent through the first half of 2011. The 2-year note yield dropped 4 basis points this week to 0.51 percent. It fell on Aug. 24 to the record low of 0.4542 percent.
Steeper Yield Curve
The extra yield investors demand to hold 10-year notes over 2-year debt rose this week for the first time since the five days ended July 23, touching 2.25 percentage points, indicating the steepest Treasury yield curve on an intraday basis since Aug. 11.
“With the short end anchored by the Fed, we are seeing some curve steepening,” said Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage-backed securities at Federated Investment Management Co. in Pittsburgh.
Volatility in the Treasury market reached a three-month high this week. Bank of America Merrill Lynch’s MOVE index, measuring price swings based on over-the-counter options maturing in 2 to 30 years, climbed on Sept. 1 to 110.10, the highest level since June 1.
Private payrolls increased last month by 67,000 after a revised gain of 107,000 in July, the Labor Department reported yesterday. The median forecast of economists in a Bloomberg News survey was for 40,000 more positions.
Overall employment fell by 54,000 for a second straight month. The unemployment rate increased to 9.6 percent, from 9.5 percent, as more people entered the labor force.
Pimco’s View
The larger-than-expected gain in company hiring lowered the odds that the Fed will seek more quantitative easing at its Sept. 21 policy meeting, according to Paul McCulley, a portfolio manager and partner at Pacific Investment Management Co., which operates the world’s biggest bond fund.
“The Fed can breathe a little bit easier,” McCulley said yesterday in an “In the Loop” interview on Bloomberg Television with Betty Liu. There’s “no compelling pressure to move to QE2,” McCulley said.
Treasuries rallied on Aug. 10, when the Fed said at the conclusion of its policy meeting that it would keep its bond holdings level by resuming the purchase of Treasuries to support an economic recovery it described as weaker than earlier anticipated. The central bank adopted a $2.05 trillion floor for its securities portfolio.
President Barack Obama said yesterday there’s “no quick fix” for the U.S. economy as it emerges from the worst recession in more than seven decades and promised to lay out new ideas next week to boost growth and hiring.
In an effort to sustain the economic expansion, Obama’s administration has increased U.S. publicly traded debt to a record $8.18 trillion.
The government will sell $33 billion in 3-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds next week, the Treasury announced Sept. 2. The total of $67 billion is the smallest combination of the maturities since July 2009.
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net
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