Treasuries ended a three-day losing streak, the longest this year, after U.S. employers added fewer jobs than forecast for a second month in January, adding to concern that growth in the world’s biggest economy is uneven.
Five-year (USGG5YR) note yields fell the most, erasing the first weekly increase in three weeks. Rates on U.S. three-month bills jumped to a two-month high as an accord suspending the nation’s debt limit expires and Treasury Secretary Jacob J. Lew said measures to stay under the ceiling probably will be exhausted within three weeks. The Federal Reserve has cut its monthly bond purchases under quantitative-easing to $65 billion over the past two months from 2013’s $85 billion, citing an improving economy.
“It shows we’re still muddling through,” said Kathy Jones, a fixed-income strategist at Charles Schwab & Co. in New York. “Coming into the new year, there was a lot of optimism about the pace of growth, and that was probably over-optimistic.” Jones recommends Treasuries as a way to cut risk.
Five-year yields dropped five basis points, or 0.05 percentage point, to 1.47 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They declined two basis points on the week. The price of the 1.5 percent securities due in January 2019 gained 1/4, or $2.50 per $1,000 face amount, to 100 5/32.
Ten-year note yields decreased as much as seven basis points to 2.63 percent before trading at 2.68 percent, down two basis points.
Treasuries maturing in three years and longer last declined for at least three consecutive trading days during the final week of December.
The yield difference between U.S. five- and 10-year notes widened three basis points to 1.21 percentage points, the most since Jan. 15, amid bets the Fed won’t start raising interest rates until at least late 2015. The central bank has signaled its benchmark rate of virtually zero won’t increase until unemployment drops, an effort to keep long-term borrowing costs from rising as it curtails stimulus.
Five-year strength “seems to be related to a better appreciation of what the Fed has been saying about forward guidance,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 24 percent to $414 billion, the highest since Jan. 30. It reached $494 billion on Jan. 29, the most in seven months.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index declined for a second day, falling to to 64.8 basis points, the lowest since Jan. 31. It rose to 67.3 basis points on Feb. 5, the highest since Jan. 9.
Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in two-year note futures in the week ended Feb. 4, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 23,566 contracts on the Chicago Board of Trade. Last week, traders were net-short 4,179 contracts.
Speculators increased bets that prices on U.S. 10-year note futures will fall. A net 135,301 contracts wagered on higher yields, up 15 percent from last week.
January’s 113,000-job gain in employment followed a revised 75,000 increase in December, the least since January 2011, Labor Department figures showed today in Washington. Economists in a Bloomberg survey projected an advance of 180,000 in January.
“The number is disappointing at a time in which the Fed is backed into a corner,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the U.S. central bank. “They will be unwilling to reverse a direction they just started. The taper is going to continue. The hurdle for not continuing the taper is exceptionally high.”
U.S. three-month bill rates touched 0.09 percent, the highest level since Dec. 11. The security due March 6 rose to 0.10 percent, approaching an 11-month high of 0.14 percent it reached on Feb. 4. The rate averaged 0.04 percent this year.
Congress and President Barack Obama agreed in October to suspend the debt ceiling through today as part of an accord to end a 16-day partial government shutdown. Lew said today in a letter to House Speaker John Boehner, an Ohio Republican, that extraordinary measures used to keep under the ceiling “are likely to be exhausted in less than three weeks.” Lew urged lawmakers to extend the limit as soon as possible.
The government will sell on Feb. 10 $42 billion of three-month bills and an equal amount of six-month bills, both record amounts, and $52 billion of 72-day bills.
The U.S. jobless rate fell last month to 6.6 percent, the lowest level since October 2008, even as more Americans entered the labor force, the Labor Department figures showed.
“The unemployment rate dropping is showing that people are actually getting jobs despite the softness in nonfarm payrolls,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “You’re seeing a rebound in emerging markets and you’re seeing a rebound in global stock markets, so the flight-to-quality bid is dissipated.”
Stocks climbed after the unemployment rate fell, with the Standard & Poor’s 500 Index up 1.3 percent and the MSCI World Index gaining 1.2 percent. A Bloomberg customized gauge tracking 20 emerging-market currencies rose 0.8 percent this week.
Pacific Investment Management Co.’s Bill Gross said 10-year Treasury yields can slide further if employment growth holds subdued and a key inflation gauge stays below the Fed’s target. He spoke in a radio interview on “Bloomberg Surveillance” with Tom Keene and Michael McKee.
The Bloomberg U.S. Treasury Bond Index (BUSY) has gained 1.6 percent this year as a drop in risk appetite and a rout in emerging-market currencies boosted haven demand.
The Fed’s bond purchases were designed to cap long-term borrowing costs and spur economic growth. In a statement Jan. 29 after their last meeting, policy makers’ decision to trim buying further showed they were sticking to their plan for a gradual withdrawal from the program as the economy progresses.
The Treasury will auction $70 billion of notes and bonds next week: $30 billion of three-year debt on Feb. 11, $24 billion of 10-year notes on Feb. 12 and $16 billion of 30-year bonds on Feb. 13.
“ Supply’s becoming a bigger factor in the marketplace as the Fed tapers QE,” said di Galoma of ED&F Man. “Supply is going to matter again.”
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