Treasuries Drop as U.S. Adds More Jobs Than Forecast

Treasuries fell for the first time in three weeks as Greece’s debt restructuring reduced the haven appeal of U.S. government securities and February’s employment report pointed to a strengthening economic recovery.

Yields on benchmark 10-year notes climbed to the highest in a week yesterday after the jobs report reduced speculation Federal Reserve policy makers may hint at next week’s meeting that they’re moving closer to more monetary stimulus. The Treasury will sell $66 billion in notes and bonds over three consecutive days beginning March 12.

“The Greek deal has been achieved and the labor market has improved, which has weighed on Treasuries some,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors.

Yields on 10-year notes rose five basis points, or 0.05 percentage point, to 2.03 percent in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2022 declined 15/32, or $4.69 per $1,000 face amount, to 99 23/32.

The 10-year yield reached as high as 2.06 percent yesterday, the most since March 1. It reached a record low of 1.67 percent in September.

The 227,000 increase in payrolls followed a revised 284,000 gain in January that was bigger than first estimated, Labor Department figures showed yesterday in Washington. Job growth over the last six months was the strongest since 2006. The median projection of economists in a Bloomberg News survey called for a 210,000 rise in February employment.

U.S. government bonds have lost 0.5 percent this year as of yesterday, while corporate debt has returned 3.2 percent, according to Bank of America Merrill Lynch indexes.

‘Turn the Page’

Treasuries rallied 9.8 percent last year as Europe’s widening sovereign-debt crisis drove investors to the world’s largest securities market.

Greece got private investors to forgive more than 100 billion euros ($131 billion) of debt, opening the way for a second bailout.

Euro-region finance ministers agreed on a conference call that with the swap Greece had met the terms for a 130 billion-euro rescue package designed to prevent a collapse of the economy. Ministers freed up 35.5 billion euros in payments and interest for bondholders, with a decision on the balance of the bailout funds to be made at a March 12 meeting in Brussels.

“You want to turn the page on these guys, but it’s unbelievable,” said Sean Murphy, a trader at Societe General SA in New York, one of 21 primary dealers that trade with the U.S. central bank. “You can’t believe it’s the end of the problems for Europe.”

Steady Demand

While the economy has added the most jobs in a three-month period since March-May 2010, when the government added temporary workers to carry out the decennial census survey, the 10-year note yield has been stuck between 1.79 percent and 2.09 percent this year.

“Any dip in yields and buyers flock back to Treasuries,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “If the events of this week can’t take us out of the range, it’s unclear what will, and it underscores how strong the demand for Treasuries has been.”

The U.S. government will sell $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds next week.

Stimulus Speculation

Policy makers were “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Fed Chairman Ben S. Bernanke said at a Jan. 25 news conference. Bond buying is “an option that’s certainly on the table,” he said.

In congressional testimony on Feb. 29, Bernanke failed to indicate that the central bank would boost stimulus. The Commerce Department on Feb. 29 raised its estimate for U.S. economic growth for the fourth quarter to 3 percent, from 2.8 percent, and the Conference Board’s gauge of confidence among American consumers climbed for February the highest in a year.

Fed officials are considering a program in which the central bank would buy long-term mortgage or Treasury bonds and effectively tie up the money by borrowing it back for short periods at low rates, the Wall Street Journal reported without citing sources. The approach would keep excess money out of the system and head off inflation, damping criticism by opponents of earlier Fed efforts to support the economy, the newspaper said.

Quantitative Easing

The Fed bought $2.3 trillion of bonds in two quantitative-easing rounds from December 2008 until June 2011 to spur the economy. In September it announced it would buy $400 billion of longer-term U.S. securities through June while selling an equal amount of shorter-term debt in its holdings to lower borrowing costs. The central bank’s target rate for overnight bank lending has been zero to 0.25 percent since December 2008.

Global central bank easing has been beneficial, Bill Gross, manager of the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co., said in a radio interview yesterday on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

Gross raised the proportion of U.S. government securities in Pimco’s $252 billion Total Return Fund to 37 percent of assets, from 38 percent in January, according to a report on the company’s website yesterday. He raised mortgages to 52 from 50 percent, the highest level since June 2009.

“These numbers are significantly better than we would have expected three to six months ago,” Gross said of the February employment figures. “There’s a long way to go before there are any inflationary pressures or relatively strong growth rates.”

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