Treasuries Fall as Drop in Jobless Claims Reduces Demand

US Federal Reserve Chairman Ben S. Bernanke
Treasuries fell yesterday as US Federal Reserve Chairman Ben S. Bernanke’s congressional testimony damped speculation the central bank will expand its economic stimulus through a third round of debt purchases. Photographer: Andrew Harrer/Bloomberg

Treasuries fell as a report showed weekly jobless claims matched a four-year low and Federal Reserve Chairman Ben S. Bernanke for the second day failed to indicate the central bank will boost economic stimulus.

The yield on the benchmark 10-year note rose to the highest level in a week after corporate bonds beat Treasuries in February as the U.S. economy showed signs of improving. Bernanke repeated testimony in the Senate that he delivered in the house yesterday and described “positive developments” in the jobs market. Spanish and French borrowing costs dropped.

“The jobs market is improving slightly,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 firms that trade Treasuries with the Fed. “Yields backed up a little bit. It’s a continuation of yesterday’s selloff in Treasuries due to the fact that Bernanke didn’t say enough to satisfy those who were expecting a more dovish statement.”

The 10-year yield climbed six basis points, or 0.06 percentage point, to 2.03 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2022 fell 1/2, or $5 per $1,000 face amount, to 99 3/4. The yield touched the highest since Feb. 22. The yields have traded as low as 1.79 percent and as high as 2.09 percent this year.

Thirty-year bond yields rose six basis points to 3.15 percent, reaching the most since Feb. 22.

Bond Returns

“We’ve been at rich levels for a while,” said Anthony Cronin, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the central bank. “It’s an unwind of trades put on by people anticipating easing by the Fed. The focus is starting to shift to next week’s payrolls.”

An index of U.S. sovereign securities returned 0.7 percent since the end of November, versus 5.6 percent for investment-grade and high-yield company debt, Bank of America Merrill Lynch data show.

Volume in the Treasury market rose yesterday to $365 billion through ICAP Plc, the world’s largest interdealer broker. Volume touched the highest level since Jan. 25, and was above the one-year average of $273 billion.

Bernanke reiterated that inflation is likely to “remain subdued” as the Fed continues to monitor energy markets. He said the inflationary impact of higher gasoline prices is likely to be temporary.

Oil Surge

Oil in New York rose higher than $110 for the first time since May in electronic trading after the floor closed on the New York Mercantile Exchange. Crude for April delivery climbed as high as $110.55, up 3.3 percent from yesterday’s close and the highest price since May 4.

Fed policy makers have a target of 2 percent for cost increases in the economy, based on the personal consumption expenditures index.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt, was 2.28 percentage points. The decade-long average is 2.14 percentage points.

Fed Bank of Atlanta President Dennis Lockhart said he is concerned that another round of asset purchases by the Fed would fuel inflation while failing to spur lending.

Economic Pace

“I’m cautious about doing more involving expansion of the Fed’s balance sheet,” Lockhart said today in a speech in Atlanta. “Precisely because I see the transmission mechanism of monetary policy through credit channels as constricted, I have my doubts that the gains from such a policy action taken in the near term would outweigh the longer-term potential costs, including the risk to the Fed’s medium-term inflation outlook.”

Spain and France sold 12.5 billion euros ($16.6 billion) of bonds as yesterday’s European Central Bank loans to banks helped spur demand for debt.

Spain’s two-year note yield declined today to 2.096 percent, the least since 2010. The yield on France’s 10-year note dropped 11 basis points to 2.77 percent. The rate on Italy’s two-year notes dropped below 2 percent for the first time since October 2010.

Pacific Investment Management Co.’s Bill Gross, whose firm is a member of the committee that decides whether default insurance on Greek debt will pay out, said the group will probably make one more decision on the issue.

Greek Debt

The International Swaps & Derivatives Association said today that credit-default swaps tied to Greek debt won’t be paid out after it was asked to rule whether part of the nation’s $170 billion bailout was a credit event. The group said the European Central Bank’s exchange of Greek bonds for new securities exempt from losses being imposed on private investors hasn’t triggered $3.25 billion of outstanding credit-default swaps.

U.S. debt briefly pared losses after a manufacturing index unexpectedly declined in February. The Institute for Supply Management’s factory index fell to 52.4 in February from 54.1 a month earlier, the Tempe, Arizona-based group’s data showed today. The median estimate of 78 economists surveyed by Bloomberg News was for a rise to 54.5. Readings above 50 signal growth.

Applications for jobless benefits decreased 2,000 in the week ended Feb. 25 to 351,000, Labor Department figures showed today. The number matches that in the Feb. 11 week, which was the lowest since March 2008. Economists forecast 355,000 claims, according to the median estimate in a Bloomberg News survey.

A Labor Department report on March 9 may show nonfarm payrolls grew by 206,000 in February, after 243,000 jobs created the previous month, according to Bloomberg News survey of economists, The unemployment rate is forecast to remain at 8.3 percent.

“Fundamentally, it’s difficult to make the case that we should be at 2 percent” on the 10-year yield, said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, another primary dealer. “The data are telling us we remain in a modest growth backdrop.”

Treasuries posted a loss of 0.7 percent last month, compared with a return of 0.5 percent for January, according to Bank of America Merrill Lynch data.

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