Treasury Yields Fall From Eight-Month High on Jobless-Rate Miss

Treasury 10-year note yields fell from a more than eight-month high after the U.S. unemployment rate in December was higher than forecast, boosting speculation the Federal Reserve’s stimulus efforts may not end anytime soon.

U.S. government debt declined earlier after minutes released yesterday of the Fed’s last meeting showed policy makers might end its third round of monthly bond purchases under quantitative easing this year. Treasuries pared earlier losses today as Labor Department figures showed the U.S. unemployment rate was 7.8 percent last month, matching November’s rate that was revised up. The median estimate of 78 economists surveyed by Bloomberg was 7.7 percent.

“The Fed has to continue to provide the stimulus while we are in dire straits,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “The Fed is keeping rates low until 2015. That hasn’t wavered.”

Ten-year note yields declined one basis point, or 0.01 percentage point, to 1.90 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They earlier touched 1.97 percent, the highest level since April 26. The yield fell to a record low of 1.38 percent on July 25. The price of the 1.625 percent security rose 1/8, or $1.25 cents per $1,000 face value, to 97 17/32.

The 30-year bond yield declined three basis points to 3.10 percent after reaching 3.18 percent, the highest since April 25.

Net Longs

Hedge-fund managers and other large speculators decreased their net-long position in 30-year bond futures to the least in almost two months in the week ending Jan. 1, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 435 contracts on the Chicago Board of Trade, the least since Nov. 6. Net-long positions fell by 4,270 contracts, or 91 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Large speculators increased their long positions over short positions in 10-year note futures by 78,927 contracts, up from 74,151 contracts the previous week. Meanwhile, large speculators increased their net-long bets on two-year futures by 163,545 contracts, near the most since August.

Term Premium

U.S. government securities traded today close to the least expensive levels in eight months. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, touched negative 0.67 percent, the least costly since May.

A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average last year was negative 0.77 percent.

Treasury volume rose today to the most in almost four months, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume rose to $403 billion in New York, the most since Sept. 13. Daily volume averaged $239 billion in 2012.

Volatility in Treasuries reached the highest level in almost two months yesterday. Bank of America Merrill Lynch’s MOVE index, which measures price swings of U.S. government securities based on options, rose to 63.5 basis points, the most since Nov. 6. The 2012 average was 69.8 basis points.

A separate report today showed payrolls rose by 155,000 workers last month, following a revised 161,000 advance in November that was more than initially estimated, the Labor Department said in Washington. The median estimate of 82 economists surveyed by Bloomberg called for a increase of 152,000.

Stimulus Terminus

Federal Reserve Bank of Richmond President Jeffrey Lacker said further monetary stimulus is unlikely to boost growth and will “test the limits” of the U.S. central bank’s credibility.

“At some point, we will need to withdraw stimulus by raising interest rates and reducing the size of our balance sheet, and the larger our balance sheet, the more vulnerable we will be to seemingly minor miscalibrations in policy,” Lacker said in prepared remarks to the Maryland Bankers Association in Baltimore.

The Fed said after its Dec. 11-12 meeting said it would hold borrowing costs low “at least as long” as the unemployment rate remains above 6.5 percent and inflation projections are for no more than 2.5 percent. The jobless rate had stayed above 8 percent since February 2009 until it broke the trend in September.

“At 7.8, that tells us we still have an unemployment problem and the Fed will still be engaged,” Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., said on Bloomberg Television.

Divided Fed

Primary dealers expected the Fed to continue with its asset-purchase program for more than a year in a survey conducted by the Federal Reserve Bank of New York before the December meeting.

The median respondent in the survey predicted that the central bank will continue with is asset-purchase program until the first quarter of 2014. The Fed’s 21 primary dealers trade government securities with the central bank and are obligated to bid in Treasury auctions.

Treasuries extended losses yesterday after Fed policy makers said they may end their $85 billion monthly bond purchases sometime in 2013, with members divided between a mid- or end-of-year finish.

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.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

11:13

Jan. 4 (Bloomberg) -- Bill Gross, co-chief investment officer at Pacific Investment Management Co., talks about the December U.S. employment report and investment strategy. Payrolls rose by 155,000 workers last month Labor Department figures showed today in Washington. Gross, speaking with Erik Schatzker and Stephanie Ruhle on Bloomberg Television's "Market Makers,” also discusses the outlook for bipartisanship in federal fiscal negotiations. (Source: Bloomberg)