Treasury 10-year notes headed for their first weekly decline this year on speculation a jobs report today will encourage the Federal Reserve to keep reducing its bond purchases.
The extra yield that benchmark Treasuries offer over their Group of Seven counterparts was more than double the average over the past year. Investors shifted record amounts out of U.S. stock funds and into bonds in the week ended Feb. 5, according to Citigroup Inc. American employers added more than twice as many workers in January as in the prior month and the unemployment rate held at a five-year low, economists project the labor report will show today.
“The U.S. recovery and the taper can continue,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “We could easily see Treasury yields rally seven to eight basis points if it’s a decent payrolls number. Most people view the recent U.S. data blip as temporary.”
The U.S. 10-year yield was little changed at 2.71 percent at 6:49 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.75 percent note maturing in November 2023 was 100 3/8. The yield has climbed six basis points, or 0.06 percentage point, this week.
While the Fed is reducing support for the economy, policy makers in Europe and Japan are considering ways to keep down borrowing costs to fuel growth. Treasuries yielded 46 basis points more than their Group-of-Seven peers, compared with the 12-month average of 17 basis points, based on a customized Bloomberg index. The spread was as wide as 54 basis points in January, and was negative as recently as June.
U.S. employers added 180,000 workers in January, after hiring 74,000 the prior month, based on a Bloomberg survey before the Labor Department report at 8:30 a.m. in Washington. The jobless rate stayed at 6.7 percent, the lowest since 2008, a separate survey showed.
The Bloomberg U.S. Treasury Bond Index (BUSY) has fallen 0.2 percent this week. It gained 1.8 percent in January as the slowdown in U.S. jobs boosted demand for the safest assets.
U.S. equity funds had $24 billion of outflows in the week to Feb. 5, according to a report today from Citibank’s research unit. Withdrawals from stock funds worldwide totaled $28.3 billion, the report said, citing data from EPFR Global, a fund research company in Cambridge, Massachusetts.
Money managers put $13 billion into U.S. bond funds, accounting for most of the $14.8 billion that flowed into debt worldwide, the according to the report. The flow figures for the period were records.
The Federal Open Market Committee cut purchases of Treasury and mortgage debt in January and again in February to $65 billion a month from $85 billion, citing an improving outlook for the labor market. Janet Yellen took over leadership of the central bank from Ben S. Bernanke at the start of this month.
“Tapering is a foregone conclusion,” Marvin Loh, a senior fixed-income strategist at BNY Mellon Global Markets, said at a seminar in Tokyo. “We’ve got an FOMC board that’s more hawkish than it has been under the Bernanke administration.”
The Fed will end its asset-purchase program by the third quarter, when 10-year Treasury yields will approach 3.25 percent, according to Loh. Yields may increase to 4 percent by mid-2015, he said.
European Central Bank President Mario Draghi said yesterday the ECB may take action to counter low inflation as soon as next month. Economists surveyed by Bloomberg Jan. 10-15 say the Bank of Japan will expand its stimulus program, and a third of them predict the increase will come in the second quarter.
The Fed will probably hold its target for overnight lending between banks at a record low until early 2016, said Jan Hatzius, the chief economist at Goldman Sachs Group Inc. U.S. inflation signals are “quite benign,” Hatzius said at a conference in Sydney. Goldman Sachs is one of the 21 primary dealers that trade directly with the Fed.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index fell to 67.2 basis points yesterday from a four-week high of 67.3 on Feb. 5.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, fell to $334.2 billion yesterday. It increased to $494.3 billion on Jan. 29, the highest level since June 24.