Treasuries Fall Third Day Before Data Forecast to Show Job Gains

Treasuries (BUSY10) fell, pushing 10-year note yields higher for a third day, as demand for the safety of U.S. government securities ebbed before a report forecast to show payrolls growth rebounded from the slowest in almost two years.

Ten-year note yields rose from almost a three-month low as the Labor Department said initial claims for unemployment benefits declined last week, adding to speculation the Federal Reserve may make further reductions in its bond purchases. The government will sell a record amount of three- and six-month bills next week, giving it greater flexibility after tomorrow’s expiration of an accord suspending the nation’s debt limit.

“The economy is still growing, although slowly, and the Fed is still tapering, which argues for somewhat higher yields after the rally we’ve had lately,” said Scott Graham, head of the primary dealership in Chicago at Bank of Montreal’s BMO Capital Markets unit, one of the 21 primary dealers that trade with the U.S. central bank. “Still, we don’t have a clear picture of the economy.”

The 10-year yield advanced three basis points, or 0.03 percentage point, to 2.70 percent at 5 p.m. in New York after rising nine basis points during the previous two days, according to Bloomberg Bond Trader prices. It touched 2.57 percent on Feb. 3, the lowest level since Nov. 1. The price of the 2.75 percent security due in November 2023 dropped 9/32, or $2.81 per $1,000 face amount, to 100 13/32.

The 30-year bond yield increased two basis points to 3.67 percent and touched 3.68 percent, the highest since Jan. 29.

Volume Drops

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, sank 18 percent to $333 billion, the lowest level since Jan. 22. It reached $494 billion on Jan. 29, the highest in seven months.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index declined for the first time in four days, slipping to 67.2 basis points after reaching 67.3 basis points yesterday, the highest since Jan. 9.

The difference between the yields on U.S. two- and 10-year notes, called the yield curve, widened for a third day, suggesting investors are betting on faster economic growth. It increased to 238 basis points, the highest on a closing basis since Jan. 28, after shrinking to a three-month low of 228 basis points on Feb. 3.

Stocks rose, with the Standard & Poor’s 500 Index climbing 1.2 percent. Emerging-market currencies including the Russian ruble and the Hungarian forint rose versus the dollar after sliding last week.

U.S. initial jobless claims fell to 331,000 in the week ended Feb. 1, from a revised 351,000 the previous week, the Labor Department said. The median forecast of economists surveyed by Bloomberg called for a decrease to 335,000.

Payrolls Report

American employers added 180,000 jobs last month, according to a Bloomberg News survey of economists before tomorrow’s report by the Labor Department. The economy added 74,000 positions in December, the least since January 2011. A Bloomberg survey estimated a 197,000 gain. Payrolls increased last year by an average of 182,170 jobs a month.

“Clearly everyone will be waiting for critical employment numbers tomorrow,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Stability in emerging markets and equities has taken some of the froth off the table and we’ve got profit-taking in Treasuries because of that. The safe-haven bid is coming out of the market.”

Bill Sales

The Treasury said it will sell $42 billion in three-month bills and $42 billion in six-month securities at its weekly auction on Feb. 10. The three-month offering is $14 billion more than the previous week, while the six-month is $22 billion higher. Treasury will also auction $50 billion of 72-day cash-management bills the same day.

Congress and President Barack Obama agreed in October to suspend the debt limit until tomorrow as part of an accord to end a 16-day partial government shutdown. Under the agreement, Treasury was effectively required not to have a cash balance as of tomorrow that exceeded the balance on the date of the pact, according to Stone & McCarthy Research Associates. Treasury is now free to issue as much debt as it wants until extraordinary measures used to create room until the limit are exhausted.

The U.S. will auction $70 billion in notes and bonds next week: $30 billion in three-year debt, $24 billion in 10-year securities and $16 billion in 30-year bonds.

Treasuries due in 10 years and longer returned 6 percent in January, according to data compiled by Bloomberg, as declines in emerging markets boosted demand for the safest assets.

Fed Stimulus

Fed policy makers ordered the first two cuts in December and January to purchases of Treasuries and mortgage debt designed to cap borrowing costs and spur the economy. They trimmed monthly buying to $65 billion a month, from $85 billion.

The central bank bought $1.25 billion today of Treasuries due from February 2040 to August 2043 as part of the program.

Treasuries extended losses earlier after European Central Bank President Mario Draghi signaled officials will wait until March before deciding whether to cut interest rates amid weakening inflation. Draghi said policy makers need more data.

Ten-year note yields will climb to 3.42 percent by year-end, according to a Bloomberg survey of economists and analysts with the most recent forecasts given the heaviest weightings.

The odds that policy makers will increase the target interest rate for overnight lending between banks to at least 0.5 percent by January 2015 are 11 percent, based on futures contracts. The Fed has kept the rate in a range of zero to 0.25 percent since 2008 to support the economy.

The Bloomberg U.S. Treasury Bond Index (BUSY) has gained 1.7 percent this year as tumbling emerging-market currencies and signs of slowing economic growth have boosted haven demand.

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

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