Treasuries Drop, Snap Three-Day Gain, on U.S. Reports

Treasuries fell, snapping a three-day gain, as reports on U.S. employment and manufacturing indicated the economic expansion may strengthen, damping haven demand.

U.S. debt remained lower as weekly jobless insurance claims were lower than forecast and a gauge of U.S. factories expanded more than forecast last month. Treasuries declined for a third month in October, the longest slide since the last quarter of 2010, according to Bank of America Merrill Lynch indexes. The Labor Department is forecast to report tomorrow that 125,000 workers were added to payrolls, according to economists surveyed by Bloomberg.

“People are looking ahead towards payrolls and the election,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “Data was obviously a little stronger.”

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 1.72 percent at 5:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 10/32, or $3.13 per $1,000 face amount, to 99 3/32.

Trading Activity

Treasury trading volume rebounded yesterday. ICAP Plc, the largest inter-dealer broker of U.S. government debt, said trading totaled $250 after falling to a 10-month low of $82 billion on Oct. 29. The yearly average is $241.8 billion a day in 2012.

Investors in Treasuries reduced bearish bets to the lowest level since June, while increasing neutral positions, according to a survey by JPMorgan Chase & Co. The proportion of net longs was at six percentage points in the week ending yesterday, according to JPMorgan. The levels of bullish and bearish bets were equal the previous week.

Treasuries are “unlikely” to produce higher returns in the next few years, James W. Paulsen, chief investment strategist at Wells Capital Management Inc. in Minneapolis, wrote in a report.

The Fed is swapping its holdings of shorter-term Treasuries with those due in six years to 30 years to put downward pressure on long-term borrowing costs. This month, the central bank will buy about $47 billion of Treasuries and sell about $37 billion, while redeeming about $100 million, according to the Fed Bank of New York’s website.

Fed Buys

The central bank bought $1.85 billion of securities due from February 2036 to May 2042 today as part of the program. Today’s purchase was rescheduled from Oct. 30, when it was postponed due to Hurricane Sandy.

The Institute for Supply Management’s U.S. factory index rose to 51.7 in October from 51.5 a month earlier, the Tempe, Arizona-based group said today.

Economists in a Bloomberg survey projected a reading of 51 for October, according to the median of 88 forecasts. The dividing line between expansion and contraction is 50, and economists’ estimates ranged from 49.2 to 52.5.

Companies added 158,000 workers in October, according to a private report based on payrolls. The increase in employment was higher than forecast, data from the Roseland, New Jersey-based ADP Research Institute showed today. This is the first ADP report derived using a larger sample and new methodology.

Jobs Data

The median forecast of 37 economists surveyed by Bloomberg projected a 131,000 advance. Estimates ranged from 80,000 to 170,000. The previous methodology showed a gain of 162,000 jobs in September.

Applications for jobless benefits fell 9,000 to 363,000 in the week ended Oct. 27, the fewest in three weeks, the Labor Department reported today in Washington. Economists forecast 370,000 claims, according to the median estimate in a Bloomberg survey.

“From today’s data, we’re getting a little bit of a selloff because the news was a little better than expected,” William Larkin, a fixed-income money manager who helps oversee $500 million at Cabot Money Management Inc. in Salem, Massachusetts, said in a telephone interview. “Incrementally, things are getting better. Going into this nonfarm number it’s better to be neutral to short, because economic data has been moderate to improving, and it’s likely that that’s going to surface in the unemployment data.”

Labor Report

The U.S. jobless rate climbed to 7.9 percent in October from 7.8 percent in September, another Bloomberg survey of economists showed before the Labor Department data tomorrow. It will be the last of the monthly employment reports before the Nov. 6 presidential election.

“The market is obsessed with the jobs report and the election,” said Michael Cloherty, head of U.S. interest rate strategist at Royal Bank of Canada’s RBC Capital Markets unit in New York, one of 21 firms that trade directly with the Fed. “Not much else has mattered of late as even Europe has taken somewhat of a backseat.”

A Chinese manufacturing gauge based on a survey of purchasing managers climbed to 50.2 in October from 49.8 in September, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in Beijing. Readings above 50 signal expansion. South Korea’s exports unexpectedly increased in October, Statistics Korea said.

After Storm

Treasuries rose yesterday as trading resumed following the market closing on Oct. 30 for Hurricane Sandy. The storm may reduce output in the world’s largest economy by $25 billion in the fourth quarter, according to Gregory Daco, a U.S. economist at IHS Global Insight. He said that may cut the fourth-quarter pace of growth to a range of 1 percent to 1.5 percent, from the company’s earlier estimate of 1.6 percent.

Treasury yields “should stay low” as Fed stimulus is failing to spur companies to invest in production, Pacific Investment Management Co.’s Bill Gross wrote in a monthly investment outlook published on the company’s website.

“Financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick started the real economy,” but they haven’t succeeded, wrote Gross, who runs the world’s biggest bond fund.

The Treasury 10-year yield will rise to 2.07 percent by June 30, according to a Bloomberg survey of economists with the most recent projections given the heaviest weightings. The yield dropped to a record 1.379 percent on July 25.

To contact the reporter on this story: John Detrixhe in New York at jdetrixhe1@bloomberg.net

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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.