Treasury 30-year bond yields reached the highest level in seven weeks before the government sells $16 billion of the securities as added evidence of jobs gains damped speculation the Federal Reserve may expand monetary stimulus.
U.S. debt extended losses after a report showed fewer Americans filed applications for unemployment benefits last week. Yields have risen every day since the Labor Department reported Aug. 3 that the economy added 163,000 jobs in July, the most since February. Demand at yesterday’s 10-year note auction was the lowest in three years.
“If the economy is mending and things aren’t as bad as you thought, then Treasuries are still a dicey proposition here,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “Does it take the Fed out? I don’t think it takes them out completely. These are not numbers we got today that will prompt the Fed to do anything.”
The yield on the 30-year bond rose four basis points, or 0.04 percentage point, to 2.79 percent at 11:30 a.m. in New York, according to Bloomberg Bond Trader prices. The 3 percent security due in May 2042 declined 3/4, or $7.50 per $1,000 face amount, to 104 9/32. The yield reached the highest level since June 20.
The difference in yields between Treasury two- and 10-year notes widened to 1.44 percentage points, or 144 basis points, the most since May.
Investors should be wary of a steepening so-called yield curve in the U.S. Treasury market, according to Pacific Investment Management Co.’s Mohamed El-Erian.
While yields on government securities due in eight years and less are anchored by Fed monetary policy, there is “a lot more risk” in longer-maturity debt, El-Erian, the chief executive officer of the world’s largest manager of bond funds, said in a “Bloomberg Surveillance” radio interview with Tom Keene and Ken Prewitt.
The gap between 10-year yields on Treasury Inflation-Protected Securities and conventional U.S. government securities reached 2.33 percentage points, the most since April 3.
The Fed’s favored bond-market gauge of inflation expectations, the five-year, five-year measure forward breakeven rate, which shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017, rose to 2.56 percent on Aug. 6, the highest since June 12.
The 30-year bonds being sold today yielded 2.81 percent in pre-auction trading, versus the record low of 2.58 percent at the previous auction on July 12. Investors bid for 2.7 times the amount offered last month, up from 2.4 times in June.
“At a yield of around 2.75 percent today’s 30-year sale does look attractive, but there are a lot of bonds to digest,” said Craig Collins, managing director of rates trading at Bank of Montreal in London. “We may see some further cheapening going into the auction, but it should be well supported.”
Today’s sale will complete this week’s note and bond auctions totaling $72 billion. The Treasury sold $24 billion of 10-year notes yesterday and $32 billion of three-year debt on Aug. 7.
The 10-year securities drew a bid-to-cover ratio, which gauges demand by comparing bids submitted with the amount of securities offered, of 2.49, the lowest level since August 2009.
The yield on the new benchmark 10-year note sold yesterday added three basis points to 1.71 percent.
U.S. government securities have returned 1.9 percent in 2012, versus 7.8 percent for an index of investment-grade and high-yield company debt, according to Bank of America Merrill Lynch data. Company bonds yield 2.67 percentage points more than Treasuries, with the difference narrowing from 3.48 percentage points at the end of last year, Bank of America Merrill Lynch data show.
The Fed purchased $1.6 billion of Treasury Inflation Protected Securities maturing from January 2025 to February 2042 today, according to the website of its New York branch. The purchases are part of the central bank’s effort to swap shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.
Jobless claims unexpectedly dropped by 6,000 to 361,000 in the week ended Aug. 4, Labor Department figures showed today in Washington. The median forecast of 43 economists surveyed by Bloomberg News called for an increase to 370,000.
The data on U.S. jobless claims were available on the Labor Department’s website about 15 minutes before their scheduled release today, according to Stone & McCarthy Research Associates. The firm was able to access jobless claims figures from the Labor Department’s website before the embargoed time of 8:30 a.m., said Terry Sheehan, an economic analyst at Stone & McCarthy in Princeton, New Jersey.
Payrolls rose 163,000 in July following a revised 64,000 rise in June that was less than initially reported, Labor Department figures showed Aug. 3 in Washington. The median estimate of 89 economists surveyed by Bloomberg News called for a gain of 100,000. Unemployment rose to 8.3 percent.
Thirty-year yields will decline to 2.64 percent by the end of the third quarter, according to a Bloomberg survey of banks and securities companies with the most recent projections given the heaviest weightings.