Ten-year note yields touched the highest in five days, erasing a rally, after European Central Bank President Mario Draghi failed to take immediate steps to support the euro region’s economy. While the U.S. in July added the most jobs in five months, the Fed had earlier indicated a sluggish economy may prompt further steps to boost growth. The government will sell $72 billion in three-, 10- and 30-year debt next week.
“What Draghi gave us, the payrolls took away,” Chris Ahrens, an interest-rate strategist in Stamford, Connecticut, at UBS AG, one of the 21 primary dealers that trade with the Fed. “We had a nonfarm payroll number that was certainly on the outside edge of expectations, but it wasn’t a spectacular number. It was merely a better than expected number.”
The 10-year yield rose on the week two basis points, or 0.02 percentage point, to 1.56 percent, according to Bloomberg Bond Trader prices. The yield touched 1.38 percent on July 25, the lowest ever.
The 30-year yield increased two basis points to 2.64 percent after touching an all-time low of 2.44 percent on July 26.
Payrolls rose 163,000 following a revised 64,000 rise in June that was less than initially reported, Labor Department figures showed yesterday in Washington. The median estimate of 89 economists surveyed by Bloomberg News called for a gain of 100,000. Unemployment rose to 8.3 percent.
Central banks, including the Fed, have stepped in to bolster the economy as global growth has slowed and as hiring in the U.S. dropped off from a 19-month high of 275,000 in January.
“The breadth of employment gains was encouraging,” Joe LaVorgna, chief U.S. economist at Deutsche Bank AG in New York, wrote in a research note. “That the pace of hiring is reaccelerating diminishes the likelihood of further aggressive Fed action in the near term.”
The Fed said Aug. 1 after a policy meeting it “will provide additional accommodation as needed” to spur growth and employment, while it refrained from expanding monetary stimulation this month.
The central bank bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE, to cap borrowing costs. It is now in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.
The Labor Department will report Aug. 9 that initial jobless claims this week rose to 370,000 from 365,000 in the previous period, according to the median forecast of economists surveyed by Bloomberg.
“The combined central bank no-moves were the most significant event in interest-rate trading this week,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed-income assets, said in a telephone interview. “It’s a realization for investors that they can’t count on infinite money printing to support the market.”
Draghi signaled the ECB intends to join forces with governments to buy bonds in sufficient quantities to ease the region’s debt crisis, while conceding that Germany’s Bundesbank has reservations about the plan. Officials are working on the plan and details will be fleshed out in coming weeks, he said.
“What the market is looking for is a bond-purchase scheme,” Anthony Valeri, a market strategist at LPL Financial Corp., which oversees about $350 billion of assets. “The ECB was most definitely a disappointment. They have a little bit of a credibility issue going forward if they don’t follow through with policy.”
The Fed yesterday sold $7.8 billion of Treasuries due from January 2013 to April 2013 yesterday as part of its plan to contain borrowing costs by swapping short-term Treasuries in its holdings for longer maturities. The central bank said June 20 that it would enlarge the program, known as Operation Twist after a similar tactic used in the 1960s, to $667 billion from $400 billion.
Ten-year yields will climb to 1.82 percent by year-end, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings. The yield has averaged 3.14 percent over the past five years.
Ten-year notes have returned 5.3 percent this year, compared with a 2.8 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes. Yields on 10-year Treasuries will likely trade in a range of about 1.4 percent to 1.7 percent in the near term, LPL Financial’s Valeri said.
“Nothing has really changed materially,” he said. “QE3 is very much on the table.”
To contact the reporter on this story: John Detrixhe in New York at firstname.lastname@example.org