Treasuries Poised for Second Weekly Gain Before U.S. Jobs Report

Treasuries headed for a second weekly gain on speculation a U.S. employment report today will bolster the Federal Reserve’s view that the economy requires support from record-low interest rates even as it adds jobs.

U.S. government debt returned 0.3 percent this year, compared with a loss of 0.2 percent from German bonds, Bank of America Merrill Lynch indexes show. Yields tumbled this week, sending five-year rates to a record low, after the Fed said on Jan. 25 it will keep the benchmark interest rate near zero until at least late 2014. Chairman Ben S. Bernanke said the central bank is considering buying bonds to sustain the expansion, a strategy known as quantitative easing.

“Recent data out of the U.S. showed the economy has improved, but not at a pace that would make us comfortable to back down from our call that the Fed will do a third round of quantitative easing,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “The Fed is likely to do more rather than less to make sure the momentum continues. That should be supportive for Treasuries.”

U.S. 10-year yields were little changed at 1.82 percent at 7:22 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note maturing in November 2021 traded at 101 19/32. The yield dropped seven basis points, or 0.07 percentage point, this week.

Five-year notes yielded 0.71 percent after falling to a record 0.6981 percent on Jan. 31.

Extra Jobs

U.S. employers added 140,000 workers in January, after hiring 200,000 in December, according to a Bloomberg News survey before the Labor Department report today. The unemployment rate will hold at 8.5 percent, a separate survey showed.

“The rally in Treasuries can keep going for the coming months,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $43.2 billion. “U.S. employment conditions are fragile. Inflation will be kept at bay.”

The 10-year yield will fall to 1.5 percent by June 30, said Nakamura, who predicted last year’s Treasuries rally.

A gauge of whether U.S. economic reports have been beating or falling short of forecasts fell to the lowest since November yesterday. The Citigroup Economic Surprise Index dropped to 49.5 from as high as 91.9 on Jan. 6. A positive reading suggests economic releases have beaten consensus.

Treasuries were underpinned after Fed Bank of Chicago President Charles Evans told reporters yesterday the central bank needs a clear, low-rate commitment or a third round of purchases of Treasuries and mortgage bonds to further stimulate a still struggling economy.

Inflation Goal

The central bank has already purchased $2.3 trillion of Treasury and mortgage-related bonds in two rounds of easing that ended in June. Bernanke yesterday told lawmakers the Fed wouldn’t sacrifice its inflation goal to boost employment.

Improvement in the economy has yet to increase inflation expectations. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.15 percentage points, down from as high as 2.67 percentage points in April.

Inflation will be in check in 2012 and may quicken after that, according to BlackRock Inc., the world’s biggest money manager.

“The Fed wants to err on the side of creating a bit more inflation,” said Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock, which manages $3.51 trillion. “I don’t think it’s a 2012 event. As you get into 2013, 2014, you could see more.”

More Easing

The Fed is open to doing more quantitative easing, Rieder said, speaking yesterday in an interview from London. BlackRock added to its holdings of TIPS due in 10 years and longer a few weeks ago, he said.

The central bank is in the process of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs, under a program it plans to conclude in June.

The Fed is scheduled to sell as much as $8.75 billion of securities due from May to November of this year today as part of the exchange, according to the New York Fed’s website.

The U.S. is due to sell $72 billion of coupon-bearing securities including 30-year bonds next week.

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