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Treasuries Snap 3-Day Advance on Bets Jobs Data Will Show Growth

Treasury 10-year notes snapped a three-day advance before a government report this week that economists predict will show U.S. employers added the most jobs since April last month.

Benchmark yields rose from the lowest level since July before a separate report Oct. 25 forecast to show durable goods orders climbed. Treasuries are lagging behind stocks and corporate bonds this month, even after fiscal gridlock in Washington forced some federal agencies to close for 16 days. The U.S. sold $35 billion of three-month bills and $30 billion of six-month securities for the first time since the government reopened at lower yields than the previous auction and below-average demand.

“People are just getting ready for tomorrow’s payroll report,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia (BNS), one of 21 primary dealers that trade with the Fed. “We’re in a very tight range.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.60 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in August 2023 fell 6/32, or $1.88 per $1,000 face amount, to 99 1/8. The yield declined to 2.54 percent on Oct. 18, the lowest since July 24, down from a 2013 high of 3 percent on Sept. 6.

September nonfarm payrolls data originally scheduled to be released on Oct. 4 were postponed by the government shutdown that ended last week.

Relative Value

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 16 percent to $209 billion, from $249 billion on Oct. 18. The average this year is $315.4 billion.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index (BUSC) was at 71.47 today. It touched 70.09 on Oct. 17, the lowest level since May 24. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 on May 9.

The Bloomberg U.S. Treasury Bond Index has risen 0.3 percent this month. The Standard & Poor’s 500 Index (SPX) of shares returned 3.9 percent as the gauge climbed to a record on Oct. 18. The Bloomberg U.S. Corporate Bond Index advanced 1 percent.

The seven-day relative strength index (BUSY) for the Treasury 10-year note yield was at 39 today, up from 32 on Oct. 18, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

‘Drift Higher’

The term premium, a model that includes expectations for interest rates, growth and inflation, was at 0.23 percent, up from 0.21 percent on Oct. 17, the lowest level since July 23.

The gauge has declined from this year’s high of 0.63 percent set Sept. 5, signaling the cheapest levels of 2013. A positive reading indicates investors are getting yields that are above what is considered fair value.

“We are toward the lower end of this range, we have more room to see yields drift higher,” said Michael Cloherty, head of U.S. interest rate strategy in New York at Royal Bank of Canada’s RBC Capital Markets unit, a primary dealer. The range is 2.5 to 2.8 percent, he said.

Treasuries remained lower as the purchases of previously owned homes fell less than forecast in September. Sales dropped 1.9 percent to a 5.29 million annual rate, the National Association of Realtors reported today in Washington, compared with a 3.3 percent decline that was the median forecast of 67 economists in a Bloomberg survey.

Payrolls Report

U.S. employers added 180,000 workers in September from 169,000 in August, according to the median estimate of analysts surveyed by Bloomberg News, indicating the economy was gaining momentum before the shutdown.

“We’re going into tomorrow’s NFP report near the recent lows in yields, and this could leave the market somewhat vulnerable to a consensus or a better release,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “If we get a strong number, we could see yields back up to the middle of the recent range” of about 2.65 percent.

Durable goods orders rose 2 percent in September from 0.1 percent a month earlier, according to a survey of analysts before the U.S. Census Bureau data is released on Oct. 25.

March Taper

The Fed is buying $85 billion of Treasury and mortgage bonds a month to support the economy by putting downward pressure on borrowing costs and pumping money into the economy. The Fed today purchased $3.69 billion in notes maturing from July 2019 to September 2020 today.

Economists expect the Fed to delay the first cut to its quantitative-easing program until March, according to the median estimate of economists in a Bloomberg survey conducted Oct. 17-18 after the government resumed services.

Before the shutdown, most policy makers said the central bank would probably cut the bond purchases this year, based on the minutes of the central bank’s meetings. S&P estimated the shutdown probably shaved at least 0.6 percent off fourth-quarter growth.

Treasury-bill rates fell on Oct. 18 as the agreement on Capitol Hill averted a potential default.

One-month rates were 0.02 percent today, after surging on Oct. 16 to 0.45 percent, the highest level since October 2008. Even when concern that the government would default was at its highest, yields remained lower than historical levels, with one-month rates averaging 1.5 percent in the past decade.

Bill Sales

Bidding at the U.S. Treasury’s auction of $35 billion in three-month bills showed this month’s partial government shutdown remains on the minds of investors even after a last-minute agreement removed the risk of default.

The three-month bills sold today at a discount rate of 0.035 percent, down from 0.13 percent at the last auction on Oct. 15 that was the highest since February 2011.

The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 4.03, below the average of 4.64 at 40 bill sales this year before the Oct. 1 shutdown. It was 3.13 times at the previous auction, the least since July 2009.

The six-month bills sold at a discount rate of 0.070 percent, compared with 0.15 percent at the last auction, the highest since November 2012. The bid-to-cover ratio was 4.45, compared with an average of 4.91 at the past 10 auctions. The ratio of 3.52 on Oct. 15 was the lowest since October 2009.

Overseas investors, who own almost half the Treasuries outstanding, reduced holdings for four consecutive months through July, the longest stretch since 2001.

America’s borrowing costs are on the cusp of exceeding the rest of the world for the first time since 2010. Yields on Treasuries are within 0.2 percentage point of the 1.57 percent for sovereign debt outside the U.S., according to Bank of America Merrill Lynch indexes.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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

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