U.S. Bond Yields Reach Almost 2-Year High on GDP, Jobs Reports

Treasuries fell, pushing 30-year bond yields to almost a two-year high, after reports showing stronger-than-forecast economic growth and jobs bolstered speculation the Federal Reserve may reduce its bond-buying.

Benchmark 10-year yields touched a three-week high after a report showed the U.S. economy grew at a faster than projected pace and the ADP Research Institute said employers added more workers than forecast in July, bolstering economist forecasts that the Labor Department’s monthly employment data released Aug. 2 will show unemployment fell in July. The Fed may comment on the path for its $85 billion in monthly purchases after a policy meeting today.

“We had a pretty strong data from the ADP to GDP that is weighing on the market ahead of the Fed,” said Richard Gilhooly, an interest-rate strategist at Toronto-Dominion Bank’s TD Securities unit in New York. “The focus remains on jobs and stronger data that continue to pressure the market to higher rates.”

The benchmark 10-year yield added four basis points, or 0.04 percentage point, to 2.65 percent at 1:01 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 1.75 percent note maturing in May 2023 lost 11/32, or $3.44 per $1,000 face amount, to 92 1/4. The yield reached the highest level since July 8.

Thirty-year bond yields reached 3.74 percent, the most since Aug. 16, 2011.

Debt Returns

U.S. government securities generated a loss of 0.2 percent in July through yesterday and have declined 2.6 percent for the year, according to the Bloomberg U.S. Treasury Bond Index. (BUSY)

The MSCI All-Country World Index of shares returned 5 percent including reinvested dividends. The difference between U.S. government debt and global equities is the most since a gap of 5.6 percentage points in January.

The difference between two- and 30-year yields widened to 339 basis points, the most since August 2011, having expanded from this year’s low of 260 basis points on April 23. A steeper yield curve reflects diminishing demand from investors for longer-maturity bonds as they anticipate quicker economic growth and inflation.

The Treasury Department announced it plans to sell the first floating-rate notes in January and expects to gradually decrease coupon-auction sizes during the coming quarter as the nation’s fiscal health improves.

Floating Rates

Three months ago, the Treasury had said floating-rate sales may occur as early as the fourth quarter this year. The Treasury also said sales next week of notes and bonds will be unchanged from last quarter at $72 billion. The quarterly refunding, held in February, May, August and November, have remained at that level since November 2010.

“The Treasury is taking a very conservative and cautious approach as the improvement in fiscal situation has been somewhat questionable this year,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 21 primary dealers that are required to bid at government debt auctions. “The sustainability of the improvement we’ve seen is not entirely clear. So the Treasury doesn’t want to have to ramp up borrowing again after cutting it.”

The August auctions will allow refunding of $69.6 billion of securities maturing on Aug. 15 and raise $2.4 billion of new cash.

U.S. gross-domestic-product growth was 1.7 percent in the second quarter at an annualized rate, compared with a Bloomberg News forecast of 1 percent. The ADP Research Institute said that employers added 200,000 jobs in July, compared with a forecast of 180,000 jobs in a Bloomberg News survey of economists.

Jobs Outlook

The unemployment rate fell to 7.5 percent in July, according to the median forecast of 83 economists in a Bloomberg News survey. The economy added 185,000 jobs for the month, the median forecast of 86 economists in a separate survey shows.

The Fed, which has been buying $85 billion of bonds each month to put downward pressure on borrowing costs, will probably start reducing purchases in September, based on a Bloomberg survey. Today’s statement is scheduled for 2 p.m. in Washington.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 7.2 percent to $208.9 billion yesterday, still less than this month’s daily average of $270.7 billion. Volume has declined from June’s average of $446.2 billion a day.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 83.27 basis points yesterday. The figure has fallen from 117.89 on July 5, which the highest level since December 2010.

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

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

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