U.S., Japan, Aussie Bonds Fall on Growth Bets, Stock Gain

U.S., Japanese and Australian bonds tumbled as stocks rallied after an American report spurred optimism the world’s biggest economy will keep adding jobs.

The gap between U.S. 5- and 30-year notes widened to 2.35 percentage points, the most in four months and above the decade average of 1.50 points. Rising long-term rates indicate traders expect the economy to pick up, as they demand higher yields in case inflation quickens. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he is avoiding long-term bonds.

“The global economy continues to recover,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “That is pushing up yields and equity markets around the world.”

U.S. 10-year yields increased two basis points, or 0.02 percentage point, to 2.04 percent as of 6:47 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 dropped 6/32, or $1.88 per $1,000 face amount, to 96 11/32.

The rate on Japan’s December 2022 note climbed four basis points to 0.805 percent, the highest since Jan. 15. The extra yield investors demand to hold 10-year government bonds in the U.S. instead of Japan widened to 1.28 percentage points, the most since March.

Similar-maturity Australian yields touched 3.61 percent, the highest since May. The equivalent rate for Singapore bonds climbed to 1.55 percent, the most since September.

Stocks Advance

The Dow Jones Industrial Average (INDU) of U.S. shares exceeded 14,000 last week for the first time since October 2007. The MSCI Asia Pacific Index (MXAP) rose as much as 0.9 percent today to the highest since August 2011.

China’s non-manufacturing Purchasing Managers’ Index increased to 56.2 in January from 56.1 in December, according to a report yesterday. A reading above 50 indicates expansion.

U.S. payrolls increased by 157,000 workers in January, following a revised 196,000 gain the prior month and a 247,000 jump in November, Labor Department figures showed Feb 1. The unemployment rate unexpectedly climbed to 7.9 percent.

Federal Reserve Bank of St. Louis President James Bullard said in a Feb. 1 interview that he expects growth in the world’s biggest economy to gain enough momentum to let the central bank reduce the pace of bond-buying as early as the middle of the year.

Continued Purchases

Bullard backed the Federal Open Market Committee’s decision last week to continue purchasing securities at the rate of $85 billion a month, the third round of a policy known as quantitative easing or QE. Fed officials have pushed the benchmark interest rate close to zero and expanded central bank assets to more than $3 trillion to spur growth and reduce unemployment.

The Treasury Department will release today its borrowing estimates for the current quarter and the three months beginning April 1. The department has resorted to “extraordinary measures” to continue funding the government after reaching its statutory debt limit. The House of Representatives voted Jan. 23 to suspend the $16.4 trillion federal debt ceiling until May 19.

Derivatives traders are signaling there’s little chance of a bear market in Treasuries for the next three years.

Demand for insurance against a steep rise in 10-year note yields, the so-called payer skew in options on swaps, has fallen to about its average since 2009, according to Barclays Plc data. The gap between volatility on three-year options that allow investors to pay fixed rates on 10-year interest-rate swaps and those that grant the right to receive fixed rates has narrowed to about 15 basis points from 25 points on June 1.

Unemployment Concern

“The concern and focus of the Fed is still unemployment,” William O’Donnell, the head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, said in an interview on Jan. 28. “And in the Fed’s eyes it’s not good enough yet,” he said.

A Bank of America Merrill Lynch index showed the debt handed investors a 1 percent loss last month, the worst start to a year since 2009.

Technical indicators are signaling the increase in yields may be nearing an end.

The 14-day relative strength index for the 10-year Treasury yield was at 71 today, above the level of 70 that suggests to some traders the rate has advanced too quickly and may be set to reverse course. The figure for the 30-year yield was at 71.8.

U.S. inflation will be benign in 2013, Pimco’s Gross said in a Feb. 1 interview with Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” It may pick up in 2014 to 2016, he said.

Faster inflation “will create an upper drift in long-term yields,” Gross said. “How do we play it? We avoid long-term bonds.”

The Fed’s measure of inflation expectations for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, climbed to 2.89 percent. It hasn’t been so high since August 2011. The average over the past decade is 2.75 percent and compares with an annual inflation rate of 1.7 percent as measured by consumer prices.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Kristine Aquino in Singapore at kaquino1@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net

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