Treasuries Fall as Jobless Claims Decline, Bond Auction Looms

Treasuries fell for a third day after initial claims for unemployment benefits in the U.S. declined more than forecast and retail sales increased, adding to signs of resilience in the world’s largest economy.

Bonds pared losses as safety demand rose after U.S. House Speaker John Boehner said President Barack Obama isn’t serious about resolving a budget showdown. Yields on 30-year securities earlier reached the highest level in almost six weeks before the U.S. auctions $13 billion of the debt. The Federal Reserve said yesterday it plans to buy $45 billion of U.S. government securities each month from January and took the unprecedented step of linking stimulus measures to unemployment and inflation.

“It was a good set of data,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade with the Fed. “It appears the labor market got a little bit of a boost in November. Combine that with a better sales outcome, and the Treasury market reaction is appropriate.”

The 30-year bond yield increased two basis points, or 0.02 percentage point, to 2.91 percent at 11:58 a.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.93 percent earlier, the highest level since Nov. 2. The price of the 2.75 percent security maturing in November 2042 fell 10/32, or $3.13 per $1,000 face amount, to 96 29/32.

The benchmark 10-year yield rose three basis points to 1.73 percent after touching 1.74 percent, the most since Nov. 7.

Renewed Pessimism

Treasuries trimmed gains as U.S. lawmakers from both parties expressed renewed pessimism about the prospects of reaching a budget deal before more than $600 billion automatic in tax increases and spending cuts start taking effect in January. The Congressional Budget Office has said if nothing changes, the stalemate probably would lead to a recession.

Boehner, in a prepared text for a news conference, said Obama’s proposals have been “anything but” a balanced approach.

The 30-year bonds scheduled for sale today yielded 2.910 percent in pre-auction trading, compared with 2.82 percent at the previous offering of the securities on Nov. 8.

Investors bid for 2.77 times the amount of debt available last month, the most this year. Indirect bidders, a category that includes foreign central banks, bought 45.4 percent of the bonds, the most since April 2011.

The Treasury auctioned $21 billion in 10-year notes yesterday, drawing a yield of 1.652 percent, the lowest since July, and $32 billion in three-year securities the previous day at a record-low yield of 0.327 percent.

Auction Schedule

The department said today it will sell next week $35 billion in two-year debt, an equal amount of five-year securities, $29 billion in seven-year notes and $14 billion in inflation indexed securities. The auctions will be on four consecutive days beginning Dec. 17.

Treasury trading volume rose yesterday to the highest in more than a month. It climbed to $339 billion, the highest since Nov. 7, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It was $139 billion on Dec. 10, a two- week low. Daily volume has averaged $240 billion in 2012.

The decision by the Fed yesterday to buy more securities will follow the expiration at year-end of Operation Twist, a $667 billion program in which the central bank has sold about $45 billion in short-term Treasuries each month and bought an equal amount of longer-term debt.

Twenty-nine percent of those acquisitions were of 20- to 30-year Treasuries. In its new program, 27 percent of the Fed’s purchases will be in that area, policy makers announced yesterday.

Twist Purchase

The Fed purchased $4.7 billion today in securities maturing from February 2021 to November 2022 as part of Operation Twist. It will sell as much as $8 billion of Treasuries due in 2015.

The Federal Open Market Committee said yesterday interest rates will stay low “at least as long as” the jobless rate remains above 6.5 percent and if projected inflation “between one and two years ahead” is no more than 2.5 percent.

“Inflation is one of the complications” from the Fed’s extended purchase of securities, Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. said in a Bloomberg Television interview today on ’In the Loop’ with Betty Liu. “It has inflationary potential. It hasn’t happened yet. The Fed is comforted by that.”

Yield Curve

The extra yield investors demand to hold 30-year bonds instead of two-year notes, the yield curve, increased to 265 basis points, the most since Oct. 18. The spread reached a 2012 high of 310 basis points on March 19 and a low for the year of 224 basis points on July 25.

Applications for jobless benefits in the U.S. fell by 29,000 to 343,000 in the week ended Dec. 8, the fewest since reaching a four-year low in the period ended Oct. 6, Labor Department data showed today. Economists in a Bloomberg survey forecast 369,000. The number of people on unemployment benefit rolls declined for a fourth straight week.

U.S. retail sales increased 0.3 percent in November, after dropping 0.3 percent the previous month, Commerce Department figures showed today in Washington.

Wholesale prices in the U.S. fell more than forecast in November, another report showed, signaling producer-price inflation is in check.

The producer price index declined 0.8 percent, the most since May, after falling 0.2 percent in October, the Labor Department reported today in Washington. The median estimate in a Bloomberg survey of 74 economists called for a 0.5 percent decrease.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

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

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