Treasuries Led Lower by Bonds as Factory Orders Boost U.S. Growth Optimism

Treasuries (YCGT0025) declined after a report showed factory orders increased in November by the most in four months, adding to signs the U.S. economic recovery is gaining momentum.

A Federal Reserve survey of bond dealers show they expect the central bank to hold borrowing costs near zero into 2014 to support the recovery amid rising risks from Europe. Bill Gross, manager of the world’s biggest bond fund, advised investors to buy Treasuries as developed economies fail to reduce leverage and European debt risk increases.

“We’ve seen some moderately good news in some areas,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “The numbers are consistent with the moderate growth period that we’ve been in. We need some slow and steady healing of the global financial system. Fed policy is obviously designed to promote that.”

The yield on 10-year Treasury notes rose three basis points, or 0.03 percentage point, to 1.98 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.01 percent, the highest since Dec. 27. The price of the 2 percent securities due November 2021 fell 8/32, or $2.50 per $1,000 face amount, to 100 6/32.

U.S. 30-year bond yields rose five basis points to 3.03 percent while two-year yields were little changed at 0.26 percent.

Best Since 2008

Treasuries returned 9.8 percent in 2011, their best performance since 2008 according to a Bank of American Merrill Lynch index, as investors sought the safety of Treasuries as the U.S economy remained sluggish amid an expanding European debt crisis and political gridlock in Washington.

Longer-dated securities led the decline today as bookings for factory goods rose 1.8 percent after a revised 0.2 percent drop the prior month, fueled by demand for aircraft, autos and metals, data from the Commerce Department showed in Washington.

Respondents to the New York Fed’s survey of primary dealers conducted before policy makers’ Dec. 13 meeting saw a 45 percent chance the first increase in the benchmark interest rate would occur in the second quarter of 2014 or later.

The economy added 150,000 jobs in December, according to the median forecast of 76 economists in a Bloomberg News survey. The Labor Department will release the nonfarm payrolls data on Jan. 6 in Washington.

Jobless Claims

Initial jobless claims for the week ended Dec. 31 were 375,000, according to a Bloomberg News survey of 37 economists, before a report due tomorrow. Applications in the week ended Dec. 24 rose for the first time in a month, climbing by a more- than-forecast 15,000 to 381,000. The four-week moving average for claims, a less volatile measure than the weekly figures, dropped to 375,000, the lowest level since June 2008, Labor Department data showed Dec. 29.

The 10-year Treasury yield declined to 1.88 percent on Dec. 30 from 2.02 percent on Dec. 23 as investors reduced allocations to risk assets at the end of the year. Since then they have been more willing to buy securities that entail more risk.

“It’s a little of an unwind of the window-dressing trade of last week,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “A pull-back in the market is healthy and expected.”

Gross’s View

Gross, the founder of Pacific Investment Management Co. and manager of its $241 billion Total Return Bond Fund, also recommended investors purchase long-term inflation-indexed U.S. debt, high-quality corporate bonds, senior bank debt and municipal securities.

The period of muted growth in developed economies, high unemployment and “relatively orderly delevering” that Mohamed El-Erian, who shares the title of chief investment officer with Gross, coined as the “new normal” in the aftermath of the 2008 financial crisis, appears to be morphing into a world of credit and zero-bound interest-rate risk, said Gross.

“It’s as if the earth now has two moons instead of one and both are growing in size like a cancerous tumor that may threaten the financial tides, oceans and economic life as we have known it for the past half century,” Gross wrote in a monthly investment outlook posted on the Newport Beach, California-based company’s website today. “Welcome to 2012.”

Europe in Focus

Treasury yields fell earlier as German Chancellor Angela Merkel is due to host French President Nicolas Sarkozy Jan. 9 for talks in Berlin with the threat of a credit-rating downgrades still hanging over the euro area.

“Europe is certainly coming back into focus ahead of the Jan. 9 France, Germany summit,” said Guy LeBas, chief fixed- income strategist at Janney Montgomery Scott LLC in Philadelphia. “There’s been a trend for the EU summits to overpromise and under deliver.”

Treasuries fell yesterday after the Institute for Supply Management’s U.S. factory index showed U.S. manufacturing (NAPMPMI) expanded in December at the fastest pace in six months.

The U.S. 10-year yield is projected to advance to 2.69 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

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