Treasuries Halt Two-Day Slide on Speculation Costs in Check as Jobs Gain

Treasuries snapped a two-day decline as economists said a Labor Department report today will indicate U.S. employment gains aren’t enough to spur inflation.

Yields at a four-month high attracted investors as Federal Reserve Bank of Cleveland President Sandra Pianalto said she expects core inflation, which excludes food and energy costs, to be “subdued.” The Federal Reserve is scheduled to buy $6 billion to $8 billon of Treasuries due from 2013 to 2014 today as part of its plan to spur the economy.

“There is still deflation pressure,” said Hiromasa Nakamura, who helps oversee the equivalent of $35.8 billion as a senior investor in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest publicly traded bank. “That’s positive for Treasuries.”

Benchmark 10-year yields were little changed at 3 percent as of 6:44 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in November 2020 traded at a price of 96 26/32.

The yield climbed to 3.03 percent yesterday, the highest level since July 29. The rate will be 2.5 percent by the middle of next year, Nakamura said.

U.S. employers added 150,000 workers last month, after hiring 151,000 in October, according to the median forecast of economists surveyed by Bloomberg News. The advances haven’t been large enough to bring down unemployment, which held at 9.6 percent, according to a separate Bloomberg survey.

Bernanke Comment

Fed Chairman Ben S. Bernanke said Nov. 30 that the economy is “not growing fast enough to materially reduce the unemployment rate” and the rate is “about the same as it was when the recession officially ended.”

Separate reports today will show service industries, which account for almost 90 percent of the economy, grew at the fastest pace since May, Bloomberg surveys show.

Core inflation is likely “to remain quite subdued through 2013,” the Fed’s Pianalto said yesterday in Oberlin, Ohio. This measure of inflation increased 0.6 percent in October from the year before, the least on record, Labor Department data show.

The figure will slow to 0.2 percent in the second half of 2011, according to BNP Paribas, one of the 18 primary dealers that are required to bid at the government’s debt sales. Ten- year yields will fall to 2.4 percent by March 31, said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo.

Housing Recovery

Treasuries still headed for a weekly loss, with 10-year yields rising 13 basis points, after a private report yesterday showed a pickup in the housing market.

“Bonds will be a bit weaker,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $66.8 billion in assets. “We have been seeing better-than-expected economic figures.” Ten-year yields will rise to 3.25 percent by June 30, he said.

Benchmark yields increased four basis points, or 0.04 percentage point, after the prior employment report on Nov. 5, when payrolls exceeded all estimates in a Bloomberg survey.

Treasuries went on to hand investors a 0.7 percent loss last month, the steepest decline since March, according to Bank of America Merrill Lynch data.

Inflation Outlook

Mizuho’s Nakamura said he takes the shrinking spread between two- and 30-year yields as a sign of slowing inflation. The gap narrowed to 3.70 percentage points from a record 3.88 percentage points on Nov. 15.

The Fed’s plan to buy $600 billion of U.S. debt will focus about 86 percent of its purchases in notes due in 2.5 years to 10 years, leaving the so-called long bond as the security that most closely reflects market expectations for inflation.

Another measure is telling a different story.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.19 percentage points today. The figure is within two basis point of a six-month high. The five-year average is 2.09 percentage points.

Investors should favor mid-term Treasuries, especially seven-year securities, strategists Mike Cloherty and Keith Blackwell at RBC Capital Markets Corp. in New York wrote in a report yesterday. The company is another primary dealer.

The difference between two- and seven-year yields widened to 1.83 percentage points yesterday, the most since July, according to data compiled by Bloomberg.

The Fed bought $8.3 billion of Treasuries maturing from February 2018 to August 2020 yesterday, according to the New York Fed’s website.

“The ongoing euro crisis and the Fed purchases will keep a lid on how far Treasuries can fall,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

Greece was warned yesterday it may receive a lower debt rating from Standard & Poor’s.

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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