Treasury Yields Increase Most in a Year as U.S. Payrolls Swell

Treasury 10-year note yields had their biggest weekly gain in a year as U.S. employers added more jobs than forecast and services industries climbed, signaling the Federal Reserve’s stimulus efforts may be gaining traction.

The benchmark yields rose to an 11-month high as Labor Department data yesterday showed the unemployment rate slid to 7.7 percent, the lowest since December 2008. Fed Bank of St. Louis President James Bullard said the central bank will probably keep buying bonds under quantitative easing amid contained inflation expectations. Stocks climbed. The Treasury will auction $66 billion of notes and bonds next week.

“The rise in rates is a sign that the economy is getting stronger,” said Richard Schlanger, who manages $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “The Fed still has the power of the press. They’re still the 800-pound gorilla that will continue to buy in the long end.”

The 10-year note yield jumped 20 basis points, or 0.20 percentage point, to 2.04 percent this week in New York trading, the biggest increase since the five days ended March 16, 2012, according to Bloomberg Bond Trader prices. It touched 2.08 percent, the highest since April 5, 2012, after falling for the previous two weeks and sinking 11 basis points in February.

The price of the 2 percent note due in February 2023 dropped 1 26/32, or $18.13 per $1,000 face amount, to 99 5/8.

Thirty-year bond yields increased 19 basis points to 3.24 percent and touched 3.28 percent. The gap between yields on two- and 30-year securities widened to 2.99 percentage points, the most since April 4, 2012.

Less Expensive

U.S. government securities were at the least expensive level in three weeks, a gauge showed. The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached minus 0.57 percent yesterday, the least costly since Feb. 13. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average over the past year is negative 0.78 percent.

Treasuries dropped for a fifth day yesterday, the longest losing streak for 10-year notes since August, as the government said U.S. nonfarm payrolls increased by 236,000 jobs last month, after a revised 119,000 gain in January that was smaller than first estimated. Economists in a Bloomberg survey forecast 165,000. They projected the jobless rate would hold steady at 7.9 percent.

A gauge of service industries, which account for about 90 percent of the nation’s economy, rose to the highest in a year. The Institute for Supply Management’s nonmanufacturing index increased to 56 in February, the Tempe, Arizona-based group said March 5. The report followed ISM data March 1 that showed the fastest pace of manufacturing since June 2011.

‘Doing Better’

“It’s clear and unambiguous -- the economy’s doing better,” William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group’s RBS Securities unit in Stamford, Connecticut, said yesterday. The firm is one of 21 primary dealers that trade with the U.S. central bank. ‘The Fed’s policy actions are clearly having some impact.”

Stocks climbed, with the Dow Jones Industrial Average reaching a record high yesterday.

The Fed has been buying $85 billion of bonds each month since the start of the year, $45 billion in Treasuries and $40 billion of mortgage debt, in an effort to hold down borrowing costs and encourage economic growth. It has also kept its benchmark interest-rate target for overnight lending between banks in a range of zero to 0.25 percent since 2008 to support the economy.

‘Look Around’

Bill Gross, manager of the world’s biggest bond fund, said yesterday’s employment data won’t prompt the Fed to alter its stimulus measures.

Fed Chairman Ben S. Bernanke, Fed Vice Chairman Janet Yellen and New York Fed President William Dudley “have made it obvious that even if unemployment gets to 6.5 percent, they are going to look around,” Pacific Investment Management Co. founder Gross said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene. “They are going to look at the participation rate, they are going to look at the work rate, they are going to look at productivity -- those things in combination. And if they give themselves an out, if, and here’s the critical point, if inflation is still well contained.”

Policy makers reiterated after their January meeting the interest rate will stay low as long as unemployment is above 6.5 percent and inflation is projected at no more than 2.5 percent. Bernanke reiterated last week the Fed will keep buying bonds until there’s “substantial improvement” in the labor market.

Inflation Outlook

Bullard said the inflation outlook gives the central bank more time for stimulus. The Fed’s mandate from Congress is to aim for both maximum employment and stable prices.

“I think it’s going to be a while on the QE program,” Bullard, a voting member of the policy-making Federal Open Market Committee this year, said in a television interview on “Bloomberg Surveillance” with Keene and Mike McKee. “We’ve got a lot of room to maneuver here.”

Consumer prices rose 1.8 percent in February from a year earlier, the Labor Department in Washington is likely to report March 15, according to economists in a Bloomberg survey.

The Treasury will sell $32 billion in three-year notes on March 12, $21 billion of 10-year securities March 13 and $13 billion of 30-year bonds on March 14.

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

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

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