Treasuries fell for a third day, pushing the 10-year note yield to a more than seven-month high, after Federal Reserve policy makers said they may end their $85 billion monthly bond purchases sometime in 2013.
U.S. government debt fell earlier as a private report showing companies added more jobs in December boosted speculation tomorrow’s monthly employment report may top forecasts. The yield on the benchmark security rose the most since October yesterday as lawmakers approved a budget averting income-tax increases for more than 99 percent of households, breaking an impasse about how to avert the so-called fiscal cliff. Congress must next tackle the U.S. debt ceiling, which reached its $16.4 trillion limit on Dec. 31.
“The comments about discontinuing bond purchases by some members is what really pushed the levels over the edge,” said Sean Simko, who oversees $8 billion at SEI Investments Co. (SEIC) in Oaks, Pennsylvania.
Ten-year note yields rose seven basis points, or 0.07 percentage point, to 1.91 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield reached the highest since May 10. The price of the 1.625 percent security fell 21/32 or $6.56 cents per $1,000 face value to 97 13/32.
The 30-year bond yield rose nine basis points to 3.13 percent, the highest since May 4.
The minutes from the FOMC Dec. 11-12 meeting show a divide among participants on how long the purchases should last. Those who provided estimates were “approximately evenly divided” between participants who said it would be appropriate to end the purchases around mid-2013 and those who said they should continue beyond that date.
After its December meeting, the FOMC announced Treasury purchases of $45 billion a month in addition to $40 billion a month of mortgage-debt purchases begun in September, bringing the total pace of bond buying to $85 billion a month. The FOMC hadn’t set a limit on the program’s size or duration and said last month the purchases will continue “if the outlook for the labor market does not improve substantially.”
The Fed bought $5.1 billion of securities due from January 2017 to September 2017 today under its strategy of quantitative easing, or QE, according to the Fed Bank of New York.
If the drop in Treasury prices was “just because of the FOMC minutes and the news that the Fed may end its program in mid-2013, we think this was an over-reaction,” said Michael Pond, head of global inflation-linked research at Barclays Plc, one of 21 primary dealers that trade with the Fed. “We thought the market was already priced for QE3, not QE-infinity.”
Fed asset purchases of between $750 billion and $1 trillion had already been priced in, roughly matching a late-2013 end to mortgage and Treasury buying, Pond said.
Companies added 215,000 workers in last month after a revised 148,000 gain in November, data from the Roseland, New Jersey-based ADP Research Institute showed today. The median forecast of 36 economists surveyed by Bloomberg called for an advance of 140,000. Estimates ranged from gains of 70,000 to 210,000.
The economy gained 152,000 jobs in December, versus 146,000 in November, according to a Bloomberg survey of analysts. The jobless rate held at 7.7 percent, the least since 2008, according to a separate survey.
The ADP hiring report “is being viewed as more of a precursor or harbinger of tomorrow’s payrolls report, and that’s why the market is selling off,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney.
Applications for jobless benefits increased 10,000 to 372,000 in the week ended Dec. 29, the Labor Department reported in Washington. Economists forecast 360,000 claims, according to the median estimate in a Bloomberg survey. Claims in nine states and territories were estimated last week, a Labor Department spokesman said as the data was released.
“Everybody seems to be of a mindset that we’ve skirted the worst of the pernicious effects of the fiscal cliff, with the result that the economy is unlikely to go into recession this year,” said William O’Donnell, head U.S. government-bond strategist in Stamford, Connecticut at Royal Bank of Scotland Group Plc’s RBS Securities unit, a primary dealer.
Lawmakers who struck an 11th-hour budget agreement on Jan. 1 must next tackle the U.S. debt ceiling, which reached its $16.4 trillion limit the day before. While the budget measure avoids the fiscal cliff of taxes and spending cuts that threatened to push the economy into a recession, it ends a 2 percentage-point payroll tax cut and raises taxes on individuals earning $400,000 a year and households making $450,000.
“The austerity is capping yields by keeping economic growth down,” said Marc Fovinci, the head of fixed income in Portland, Oregon, at Ferguson Wellman Capital Management Inc., which has $3.2 billion in assets. “Taxes are going up.”
The revenue plan approved by Congress this week led Ferguson Wellman to cut its forecast for the pace of U.S. expansion in 2013 by half to 1.5 percent, Fovinci said. Ten-year yields may rise to 2.25 percent in a year, he said.
The U.S. will sell $32 billion of three-year notes, $21 billion of 10-year securities and $13 billion of 30-year bonds over three days starting Jan. 8, the Treasury Department announced. The amounts are unchanged from the last time the government sold this combination of securities in December.
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