Treasuries slid, pushing 10-year yields to the highest level since September, as industry data showed job growth accelerated more than forecast, adding to bets the Federal Reserve may reduce bond purchases this month.
The difference in yields on two- and 10-year notes approached the widest level since July 2011 as the ADP Research Institute said companies in the U.S. boosted payrolls in November by the most in a year. The Labor Department will report Dec. 6 that U.S. nonfarm payrolls grew last month, a Bloomberg survey forecast. Fed policy makers meet Dec. 17-18.
“We’re in a market starved for information, and the anecdotes leading up to Friday’s employment report have always been important,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “What we’re hearing from people is there’s this notion that we’ll get a strong employment number on Friday and that will increase the odds of tapering at the December meeting.”
The U.S. 10-year yield rose five basis points, or 0.05 percentage point, to 2.83 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 2.85 percent, the highest since Sept. 18. The price of the 2.75 percent security maturing in November 2023 dropped 14/32, or $4.38 per $1,000 face amount, to 99 9/32.
Thirty-year (USGG30YR) bond yields advanced six basis points to 3.9 percent. Two-year (USGG2YR) note yields were little changed at 0.29 percent after rising earlier to 0.3 percent, the highest level since Nov. 14.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased 44 percent to $402 billion, the highest level since Nov. 21, from $279 billion yesterday. The average this year is $314 billion.
The gap in yields between two- and 10-year notes increased to as much as 255.9 basis points, approaching Nov. 21’s 256.2 basis points, the most since July 2011.
The Bloomberg U.S. Treasury Bond Index (BUSY) dropped 2.2 percent since Sept. 13 last year when the Fed began the third round of its bond-purchase program. The Standard & Poor’s 500 Index of shares gained 26 percent during the period, including reinvested dividends.
Ten-year yields had the biggest intraday jump in two weeks, rising seven basis points, after Roseland, New Jersey-based ADP said companies added 215,000 jobs last month, more than the most optimistic forecast in a Bloomberg survey. The October gain was revised to 184,000, larger than initially estimated. The median forecast of economists called for a 170,000 advance in November.
“It looks like the Fed’s back in play,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $30 billion. “There’s clearly a lot more pressure on interest rates” to rise.
The Labor Department will report this week that the economy added 185,000 jobs in December, according to the median forecast of economists in a Bloomberg News survey.
Yields on 10-year notes jumped as much as 16 basis points on Nov. 8 after government data showed payrolls expanded by 204,000 jobs in October, topping the median forecast of 120,000.
The Fed buys $85 billion of bonds a month to push down borrowing costs and spur economic growth. It purchased $3.18 billion of Treasuries today due from May 2022 to August 2023 as part of the program.
Minutes of the central bank’s last meeting, released Nov. 20, showed policy makers expected economic data to illustrate improvement in the labor market and “warrant trimming the pace of purchases in coming months.”
Fed Chairman Ben S. Bernanke said Nov. 19 in a speech to economists that the benchmark interest rate will probably stay low long after the bond purchases end. Policy makers have held the rate at zero to 0.25 percent since 2008 to support the economy.
There’s a 12 percent likelihood the Fed will raise borrowing costs by its January 2015 meeting, funds futures show. That’s up from 11 percent a week ago.
Treasuries remained lower today as the Fed’s Beige Book regional-business survey said gains in manufacturing, technology and housing kept the U.S. economy expanding at a “modest to moderate” pace from early October through mid-November.
“If all of this week’s data surprise to the upside to move a December taper to 100 percent, the upper band on the 10-year U.S. Treasury should stay within 2.95 percent,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients today.
A spike in yields could hurt global equity prices, while an increase in 10-year yields to 2.95 percent would boost the dollar versus the euro, making Treasuries more attractive than European sovereign debt on a currency-adjusted basis, Vogel wrote. Selling pressure on five-year notes would take stress off longer-term securities, he wrote.
Yields on five-year notes are poised to reach 1.66 percent should they break above 1.473 percent, as Treasuries move into a more volatile environment, according to MacNeil Curry, a technical strategist in New York at Bank of America Merrill Lynch. The securities yielded 1.44 percent today.
The Bank of America Merrill Lynch MOVE index measuring volatility in Treasuries closed at 72.08 yesterday, after reaching a six-month low of 58.31 on Nov. 18. The average this year is 71.49.
The gap between yields on five- and 10-year Treasuries has widened to 140 percentage points, from 122 basis points at the end of October, as improving economic data has led to increased speculation the Fed will taper bond purchases this month.
Ten-year note yields will increase to 3.07 percent by the middle of next year and to 3.40 percent by the end, according to the average forecasts in a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings.
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