Treasuries Fall Before Data Seen Signaling Fed May Taper Further

Treasuries declined before reports this week on jobs and manufacturing that economists said will show growth is strong enough for the Federal Reserve to further reduce its bond-buying.

The benchmark 10-year note yield rose after falling the most last month since August 2011 as tumbling emerging-market currencies boosted demand for the relative safety of U.S. government securities. A report Feb. 7 is projected to show the U.S. added 185,000 jobs in January, versus 74,000 in December.

“There’s a reluctance for participants to buy higher prices,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. The market “will need reassuring data that economic activity is slowing to maintain these prices. People are looking for a bounce-back on the weaker numbers we saw lost month,” he said referring to payrolls.

The benchmark 10-year yield rose three basis points, or 0.03 percentage point, to 2.67 percent at 9:06 a.m. in New York, according to Bloomberg Bond Trader prices, after dropping to 2.64 percent on Jan. 31, the lowest since Nov. 8. The yield dropped 38 basis points in January.

The price of the 2.75 percent note due in November 2023 declined 7/32, or $2.19 per $1,000 face amount, to 100 22/32.

Thirty-year (USGG30YR) bond yields increased two basis points, to 3.62 percent. The rate dropped to as low as 3.59 percent on Jan. 31, the least since Oct. 30.

January Gain

The Bloomberg U.S. Treasury Bond Index (BUSY) gained 1.8 percent in January, the most since May 2012, as the Argentine peso led a decline in emerging currencies that also brought down the South African rand and Turkish lira.

Yields will rise by year-end, based on a Bloomberg survey of banks. Ten-year borrowing costs will climb to 3.43 percent, while the rates on bonds due in 30 years will increase to 4.26 percent, based on the responses, with the most recent forecasts given the heaviest weightings.

The Institute for Supply Management’s factory index fell to 56 in January from 56.5 in December, based on a Bloomberg News survey of economists before the report today. It’s still more than 2013’s average of 53.9 and above the level of 50 that indicates growth.

An index of non-manufacturing business in China dropped for a third month, according to data today. Growth in Chinese manufacturing slid to a six-month low in January, based on data Feb. 1. While it fell, the gauge runs counter to industry data last month that showed a contraction at the nation’s factories.

Labor Market

The outlook for the U.S. labor market is strong enough that the Fed plans to reduce purchases of Treasuries and mortgage securities to $65 billion from $75 billion this month, it said on Jan. 29, after cutting them in January from $85 billion. Central bank policy makers next meet in March in Washington.

Traders increased net long positions in Treasury 30-year bond futures by 20 percent to 68,533 contracts in the week ended Jan. 28 from the previous period, the most bullish position since 2005, according to the Commodity Futures Trading Commission.

Jason Brady, the managing director at Santa Fe, New Mexico-based Thornburg Investment Management, which oversees $95 billion, avoided 10-year Treasuries as yields fell to all-time lows and a soaring stock market slowly sapped demand for government debt. No more.

Even though the Fed is cutting the amount of bonds it buys as the economy improves, Brady said he recently scooped up the securities as yields approached a two-year high of 3 percent.

“With exuberance around risk assets that we saw toward the end of last year, which had every single strategist deciding that stocks were the best thing in the world and bonds were the worst thing in the world and that rates were certainly going higher and anybody who was otherwise is crazy -- that started to be a little much,” Brady said in a Jan. 28 telephone interview.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Neal Armstrong in London at narmstrong8@bloomberg.net

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

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