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Treasuries Trade in Tightest Range Since July on Fed Speculation

Treasury 10-year note yields traded within a quarter-percentage point of a record low as stronger- than-forecast job growth failed to blunt speculation the Federal Reserve will announce another round of bond purchases.

Yields on benchmark 10-year notes rose from the least in more than two weeks yesterday after Labor Department figures showed the U.S. added 146,000 jobs in November and the unemployment rate fell to 7.7 percent. Fed officials, who said after September’s policy meeting that they will buy bonds until the job market improves substantially, gather for the final time this year Dec. 11-12.

The Fed “easing is going to continue,” Mohamed El-Erian, chief executive officer at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest manager of bond funds, said yesterday in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “We will see more balance-sheet operations and maybe even see a tweak to the communications. The Fed will remain hyper active.”

Ten-year note yields rose less than one basis point, or 0.01 percentage point, to 1.62 percent this week, according to Bloomberg Bond Trader data. The price of the 1.625 percent notes maturing in November 2022 fell 2/32, or 63 cents per $1,000 face value, to 100.

The yield traded within a range of 9.3 basis points this week, the narrowest amount since the five days ended July 20. The yield, which dropped to a record low of 1.38 percent July 25, touched 1.56 percent on Dec. 6.

Futures Bets

Hedge-fund managers and other large speculators increased net-long positions in 10-year note futures in the week ending Dec. 4, according to U.S. Commodity Futures Trading Commission data released yesterday.

Speculative long positions, or bets prices will rise, outnumbered short positions by 202,691 contracts on the Chicago Board of Trade, compared with 187,654 in the previous week. Net- long positions rose by 15,037 contracts, or 8 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Volatility in Treasuries dropped this week to the least in five years. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, touched 51 basis points on Dec. 3, the lowest level of price swings since April 1988. It hit a 2012 high of 95.4 basis points on June 15. Volatility climbed to 264.6 basis points in October 2008 as the financial crisis intensified.

Fed Meeting

The yield difference between 10-year notes and similar- maturity Treasury Inflation Protected Securities, which represents traders’ outlook for the rate of inflation over the life of the securities, touched 2.5 percentage points yesterday, the widest since Nov. 7. The average over the past decade is 2.18 percentage points.

Primary dealers are forecasting Fed policy makers may announce more monetary accommodation as Operation Twist, as the maturity-extension program is known, expires this month. A “number” of Fed officials said at their policy meeting in October that additional monthly purchases of bonds may be warranted next year, according to the minutes of the Federal Open Market Committee.

“The Fed is on a campaign and they will continue to buy next year,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 21 primary dealers that trade with the central bank. “They are easing.”

Fiscal Cliff

The Fed is trying to sustain growth with President Barack Obama and Republican leaders in Congress unable to agree on a plan to avert the so-called fiscal cliff, or $600 billion in spending cuts and tax increases for 2013 that will start to take effect in January. The Congressional Budget Office has warned that if lawmakers don’t avoid the so-called fiscal cliff, the economy might slip into recession.

“The prolonged fiscal-cliff uncertainty and the expectation of further accommodation by the Federal Reserve is keeping a lid on how high yields can rise,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors Inc. in Pittsburgh.

The central bank bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of purchases, known as quantitative easing, or QE.

Hurricane Sandy

The employment report, released just over a month after Hurricane Sandy devastated the East Coast, was forecast to show the U.S. added 85,000 jobs, according to 91 economists in a Bloomberg News Survey. The jobless rate had stayed above 8 percent since February 2009 until it broke the trend in September.

“The data is not gangbusters, but the gains are decent,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “There’s a slight increased risk that they don’t do as much as the market was pricing in. There’s no renewed sense of urgency. We can back up a bit. We have supply next week.”

The U.S. will sell Treasuries on three consecutive days beginning Dec. 11, including $32 billion in three-year debt, $21 billion in 10-year notes and $13 billion in 30-year bonds.

To contact the reporters 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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