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Treasury 10-Year Yields Rise Most Since November on Job Growth

Treasuries fell, pushing 10-year note yields up the most in almost three months, as the economy added more jobs in January than forecast, casting doubt on the Federal Reserve’s pledge to keep interest rates low through 2014.

Yields on 30-year bonds rose to the highest in a week as an unexpected drop in the unemployment rate eased concern Europe’s debt crisis is stalling the U.S. recovery. The difference between yields on 10-year notes and the inflation-indexed securities of the same maturity was the widest since October. The U.S. will auction $72 billion in notes and bonds next week.

“The bond bulls are shaking in their boots,” said George Goncalves, head of interest rate strategy in New York at Nomura Holdings Inc., one of 21 primary dealers that trade directly with the central bank. “The rates market is not just driven by the Fed. It’s driven by the path of the economy. Investors won’t take these low rates for longer if the economic numbers continue to post as well as they have. Investors get fearful of inflation.”

Yields on benchmark 10-year notes rose 10 basis points, or 0.10 percentage point, to 1.92 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 fell 29/32, or $9.06 per $1,000 face amount, to 100 22/32. The yield climbed as much as 13 basis points, the most since Nov. 10. The yield has added three basis points this week.

A drop of more than three points in 30-year bonds pushed yields up as much as 16 basis points to 3.16 percent, the highest level since Jan. 25.

Inflation Measure

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, climbed to as much as 2.19 percentage points, the widest since Oct. 28. The so-called break-even rate, which reflects the outlook among traders for consumer prices, averaged 2.03 percentage points during the past five years.

A Fed measure of perceived risk associated with extending debt maturities, the so-called term premium, rose to 0.71 percent, after tumbling yesterday to negative 0.79 percent, the most expensive level ever. A negative reading represents overvalued levels and indicates investors are demanding premiums below what’s considered fair value.

U.S. debt securities fell after the Labor Department said employers added 243,000 jobs in January after an increase of 203,000 positions in the previous month. The median forecast of 89 economists in a Bloomberg News survey was for an increase of 140,000 jobs. The jobless rate fell to 8.3 percent, the lowest level in three years.

Fed View

Fed Chairman Ben S. Bernanke said last week after a two-day policy meeting that the central bank is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

Pacific Investment Management Co.’s Bill Gross said the Fed will maintain accommodative monetary policy and consider more asset purchases even with the U.S. employment market expanding.

“This is really an extraordinary report,” said Gross, who manages the $250 billion Total Return Fund in Newport Beach, California. “We’d caution as always that there are many structural headwinds ahead in terms our economic future. But for the moment we are heading up in terms of many of these growth metrics.”

Bernanke said yesterday in congressional testimony that the central bank will seek to keep prices rising at a 2 percent rate and rejected suggestions that it would sacrifice its inflation goal to boost employment. The Federal Open Market Committee in statement of its long-run goals and strategies on Jan. 25 specified a 2 percent goal for inflation, as measured by the annual change in the price index for personal consumption expenditures.

Trading Range

Since Nov. 1, the yield on the 10-year note has been in a range of 1.79 percent to 2.16 percent even as the unemployment rate has decreased from 9.1 percent in August. It dropped to a record low of 1.67 percent on Sept. 23.

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending Jan. 31, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 29,583 contracts on the Chicago Board of Trade. Net-short positions fell by 14,294 contracts, or 33 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Volatility in the Treasury market is near an eight-month low. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed yesterday at 70.2, the lowest since July 2007 and less than the five-year average of 111.8.

‘Solid Report’

Gains in employment in January were broad-based, including manufacturing, construction, temporary help agencies, accounting firms, restaurants and retailers, the report showed.

“It’s a solid report all around,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets, a primary dealer. “In some ways it removes some of the negative sentiment that had been building toward the economic backdrop. It’s certainly encouraging.”

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

The central bank purchased $2.3 trillion of Treasury and mortgage-related bonds in two rounds of quantitative easing that ended in June.

The Fed is in the process of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs. The central bank sold $8.61 billion of securities due from May to November today as part of the program, according to the New York Fed’s website.

The U.S. government will offer $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in bonds on three consecutive days beginning Feb. 7. The sizes are the same sold in each refunding month since November 2010.

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