Treasuries were the most expensive since January before a report this week economists said will show the U.S. labor market is falling short of what the Federal Reserve wants.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was negative 0.76 percent. It was the lowest level since Jan. 16. Negative readings indicates investors are willing to accept yields below what’s considered fair value. The U.S. jobless rate held at 7.9 percent, economists said before the March 8 report, giving the Federal Reserve reason to maintain its $85 billion monthly bond purchases.
“If unemployment stays at 7.9 percent, we’ll ratchet down to lower rates,” said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers that underwrite the U.S. debt. “The Fed’s not changing because the economy’s not improving a lot.”
Japan’s five-year rate slid to 0.095 percent, extending its decline to record lows. The 10-year Japanese government bond yield sank to 0.6 percent, the least since June 2003.
The U.S. probably added 160,000 workers last month, after employment rose by 157,000 in January, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report on March 8. The jobless rate has averaged 6 percent over the past 20 years.
A gain of 150,000 to 160,000 jobs along with 7.9 percent unemployment will send 10-year yields down to 1.75 percent over the coming month, Jalai said. A gain of 200,000 positions will push yields up to 2 percent, he said.
Growth in China services and manufacturing ebbed, underscoring demand for the relative safety of debt. Expansion in Chinese industries including retailing, transport and banking was the slowest in five months in February, an official survey of purchasing managers showed yesterday. Gauges released two days earlier pointed to manufacturing growth cooling.
The Fed probably will continue buying $40 billion of mortgage-backed securities and $45 billion of Treasuries a month though the end of the year or into 2014’s first quarter, said Russell Price, a senior economist at Ameriprise Financial Inc. (AMP) in Detroit. Price was the most accurate forecaster of monthly employment gains for the two years ended in December, according to data compiled by Bloomberg. The Fed is scooping up bonds to spur the economy by putting downward pressure on interest rates.
The U.S. economy is stronger than it was a year ago, which means investors should avoid Treasuries, said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank.
“The Treasury market is not attractive,” Shimazu said. “Equities, real estate and commodities are more attractive.”
Ten-year yields will fall to 1.83 percent by March 31 and then rise to 2.28 percent by year-end, according to a Bloomberg survey of economists, with the most recent projections given the heaviest weightings.
U.S. government securities dropped 0.3 percent this year as of March after accounting for interest payments, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index (MXWD) of stocks returned 4.3 percent.
S&P/Case-Shiller’s index of home prices in 20 U.S. cities rose in the 12 months through December by the most since July 2006. The Standard & Poor’s GSCI Total Return Index of commodities has lost 1.2 percent in 2013.
U.S. government securities were also supported by elections in Italy last week that cast doubt on the stability of the next government.
Automatic U.S. spending cuts that began March 1 in the U.S. may lower gross domestic product by 0.6 percentage point and cost 750,000 jobs by the end of 2013, according to the Congressional Budget Office. The cuts total $1.2 trillion over nine years, with $85 billion scheduled to take place in the remaining seven months of this fiscal year.
Bank of America Merrill Lynch’s MOVE Index, which tracks the outlook for swings in U.S. government debt rates, shows investors don’t anticipate an increase in price swings.
The index, which measures volatility based on prices of over-the-counter options on Treasuries maturing in 2 to 30 years, ended last week at 55. The average is about 100 since the beginning of 2000.
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