Treasuries Fall on Rise in U.S. Manufacturing, Release of Fed Minutes

Treasury 10-year notes fell for the first time in five days as a report showed manufacturing in the U.S. expanded in December at the fastest pace in six months, damping demand for the safety of government debt.

Longer-maturity bonds led the move lower as the Federal Reserve said it will for the first time make public its own forecasts for the federal funds rate, minutes from the Dec. 13 Federal Open Market Committee said today. Bonds dropped earlier as stocks rose globally amid signs economic growth is improving.

“The data was better than expected,” said Anthony Cronin, a Treasury trader in New York at Societe General, one of the 21 primary dealers that trade with the Federal Reserve. “Bonds started to sell off after FOMC. The market was anticipating a lot more from them.”

The 10-year yield (USGG10YR) rose seven basis points, or 0.07 percentage point, to 1.95 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 fell 20/32, or $6.25 per $1,000 face amount, to 100 15/32. The 30-year yield climbed nine basis points to 2.98 percent.

About $161 billion of Treasuries changed hands (ICPTVOL) in New York today through ICAP Plc, the world’s largest interdealer broker. The figure is the highest since Dec. 21. The daily average for 2011 was $285 billion.

The difference between the yields on the two-year note and the 30-year bond widened to 2.73 percentage points, the most since Dec. 27 as the Institute for Supply Management’s factory index (NAPMPMI) climbed to 53.9 last month from 52.7 in November, the Tempe, Arizona-based group’s data showed today. Fifty is the dividing line between growth and contraction, and economists surveyed by Bloomberg News forecast the gauge would rise to 53.5.

FOMC Minutes

FOMC “participants decided to incorporate information about their projections of appropriate monetary policy” into their Summary of Economic Projections starting with their next meeting, the minutes from the Dec. 13 meeting showed.

The move marks another stride toward greater transparency under the chairmanship of Ben S. Bernanke.

“Anything that they can do to give more transparency is important,” said William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts. “We are likely moving toward the end of the cycle at some point. So if they can feed us more data, it will smooth that transition.”

The difference (USGGBE10) between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, reached 2.01 percentage points today, the most since Dec. 28. The average over the past decade is 2.13 percentage points.

U.S. payrolls rose by 150,000 in December, after a 120,000 gain in November, a separate survey showed ahead of the data on Jan. 6.

‘More Optimistic’

“People are more optimistic,” said Charles Comiskey, head of Treasury trading in New York at primary dealer Bank of Nova Scotia. “The data in the U.S. has been generally better than expected. That’s reflected in the prices.”

In a statement released Dec. 13 after a policy makers meeting, the Fed said the economy in the U.S. is maintaining its expansion even as the global economy slows. The Fed left unchanged its statement that economic conditions are likely to warrant “exceptionally low” interest rates “at least through mid-2013.” The central bank lowered its target interest rate to a range of zero to 0.25 percent in December 2008.

Policy makers are unlikely to raise borrowing costs in 2012, with benchmark rates to stay at or close to zero in the U.S. and Europe, according to Pacific Investment Management Co.’s Mohamed A. El-Erian.

Pimco’s View

Pimco advises investors stay in the five- to nine-year range in bonds for safety and to earn income, El-Erian, chief executive and co-chief investment officer of the world’s biggest manager of bond funds, said in a radio interview today on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

The central bank also said last month it would continue its exchange of $400 billion of short-term debt with long-term securities to lengthen the average maturity of its holdings on its balance sheet, an effort traders dubbed Operation Twist.

Treasury yields also trended up amid data this week that showed manufacturing in Germany, China and Australia expanded. China’s purchasing managers’ index was increased to 50.3 from 49 in November, the logistics federation said Jan. 1. In Germany, the index for December was revised to 48.4 from 48.1, Markit Economics said yesterday. Australia’s manufacturing index climbed to 50.2 last month from 47.8 in November, the Australian Industry Group and PricewaterhouseCoopers LLP said.

Trading History

U.S. 10-year yields will rise to 2.17 percent by the end of first quarter, according to the median forecasts of 72 economists in a Bloomberg News survey.

Treasuries returned 9.8 percent in 2011, the most since 2008, according to Bank of America Merrill Lynch Indexes.

The decline in 10-year Treasuries today pushed yields five basis points above those (USGG10YR) on German bunds.

Treasury yields (USGG10YR) typically increase in the first four months of the year while bund yields have historically fallen in January before rising in the next four months, MacNeil Curry, head of foreign-exchange and interest-rates technical strategy at Bank of America Corp. in New York, wrote in an investor report based on historical data dated yesterday.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are scheduled to meet in Berlin on Jan. 9 to work on ways to curb government spending in the region.

Governments of the world’s leading economies have more than $7.6 trillion of debt maturing this year, with most facing a rise in borrowing costs. Led by Japan’s $3 trillion and the U.S.’s $2.8 trillion, the amount coming due for the Group of Seven nations and Brazil, Russia, India and China is up from $7.4 trillion at this time last year, according to data compiled by Bloomberg.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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