Treasury 10-Year Yield Advances to 3% for First Time Since 2011

Treasury 10-year note yields rose to 3 percent for the first time in two years as a strengthening U.S. employment market increases speculation the Federal Reserve will announce plans to slow its bond-buying program this month.

The yield on the benchmark security for everything from corporate to mortgage loans last breached that level on July 27, 2011, when lawmakers debated raising the nation’s debt limit. Fed officials are monitoring progress in the labor market as they consider dialing back their $85-billion-a-month program designed to fuel the expansion. A Labor Department report today may show companies added 180,000 workers last month and the unemployment rate held at the lowest level since 2008. The Fed’s next policy meeting is Sept. 17-18.

“U.S. data are driving yields,” said Tony Morriss, the head of interest-rate research at Australia & New Zealand Banking Group Ltd. in Sydney. Prospects for a pickup in payrolls have “quite clearly brought forward some expectations for when actual short-term interest rates can be raised.”

Benchmark 10-year yields were little changed at 2.98 percent as of 8:11 a.m. London time, according to Bloomberg Bond Trader data. Today’s high was 3.005 percent, climbing from 2013’s low of 1.61 percent on May 1. The 2.5 percent note due in August 2023 traded at 95 7/8.

Employment Market

Jobless claims declined by 9,000 to 323,000 in the week ended Aug. 31, less than the lowest estimate of economists surveyed by Bloomberg, from a revised 332,000, according to Labor Department data issued yesterday in Washington. Another report showed productivity climbed more than previously estimated in the second quarter.

Companies boosted employment by 176,000 workers in August from a 198,000 gain in July that was revised down, figures from the Roseland, New Jersey-based ADP Research Institute showed yesterday. The median forecast of 43 economists surveyed by Bloomberg called for a 184,000 gain.

The Labor Department report may show the unemployment rate held at 7.4 percent last month, according to the median estimate in a Bloomberg survey.

The employment “data point will be the deciding factor” for the Fed, said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.

Value Measure

With yields rising, the 10-year term premium signaled that the securities are the cheapest since 2011. The model, which includes expectations for interest rates, growth and inflation, was at 0.63 percent yesterday, the most since May 10, 2011. It was negative as recently as June 18. The 10-year average is 0.23 percent. A positive reading indicates that investors are getting yields that are above what is considered fair value.

Accelerating U.S. growth has prompted Fed Chairman Ben S. Bernanke to pledge to slow monetary stimulus if the economic expansion meets policy makers’ forecasts. The U.S. central bank will reduce its monthly purchases at its meeting this month, according to 65 percent of economists in a Bloomberg survey last month.

Three-month implied volatility on U.S. 10-year interest-rate swaps climbed to 118.8 basis points yesterday, the highest since July 8, according to data compiled by Bloomberg. The average over the past year is 79.30. The gauge is a measure of projected yield fluctuations over the next 90 days.

“We’ve had a strong move to the upside” in yields, said Karsten Linowsky, a fixed-income strategist at Credit Suisse Group AG in Zurich. “Everyone is waiting for these events, like the payrolls and the Fed meeting, and that’s why we’ve seen pressure to the upside in yields.”

Rate Outlook

The Fed has kept its target for overnight lending between banks at almost zero since December 2008. Investors see about a 70 percent chance policy makers will raise the so-called federal funds rate to 0.5 percent or more by January 2015, data compiled by Bloomberg from futures contracts show.

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest bond fund, said investors should buy short-term Treasuries and credit securities that will be bolstered by the Fed’s intent to keep benchmark lending rates at almost zero.

“The safest pitch to swing at may not be stocks, but the asset that will soon be the nearly sole focus of central banks,” Gross wrote in his monthly investment outlook posted on Newport Beach, California-based Pimco’s website yesterday. “Instead of QE, central bankers are shifting to forward guidance, which if reliable, allows financial markets and real economies to plan several years forward in terms of financing rates and investment returns.”

Gross’s Pimco Total Return Fund (PTTRX) has dropped more than $41 billion, or 14 percent of its assets, during the past four months through losses and investor withdrawals. The $251 billion fund suffered $7.7 billion in net redemptions in August, Chicago-based researcher Morningstar Inc. (MORN) said yesterday in an e-mailed statement, the fourth straight month of withdrawals and the second-highest amount this year.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editors responsible for this story: Rocky Swift at rswift5@bloomberg.net; Dave Liedtka at dliedtka@bloomberg.net

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