Treasuries Set for Weekly Drop as Stocks Rise on ECB Plan

Treasuries fell for a fourth day as investors awaited a monthly U.S. payroll report after industry data yesterday showed companies hired more workers in July than economists forecast.

Benchmark 10-year yields headed for their biggest weekly increase in three months as a European Central Bank plan to buy euro-area government bonds to contain the region’s debt crisis spurred a rally in stocks around the world. German bunds also declined while Spanish and Italian bonds led gains among the securities of Europe’s most highly indebted nations.

“Yields of high-grade government bonds are rising because of constructive market sentiment, which was triggered by the ECB’s announcement,” said Michael Leister, a fixed-income strategist at Commerzbank AG in London. “There is room for an upside surprise on U.S. jobs data today. It will be a volatile market into the non-farm payroll report.”

The U.S. 10-year yield climbed five basis points, or 0.05 percentage point, to 1.73 percent at 6:51 a.m. in New York after rising to 1.74 percent, the highest level since Aug. 22. The 1.625 percent note due in August 2022 dropped 15/32, or $4.69 per $1,000 face amount, to 99 1/32. The yield climbed 18 basis points this week, the most since the period ended June 8.

U.S. employers hired 130,000 workers last month, after adding 163,000 in July, according to a Bloomberg News survey before today’s Labor Department report. Companies created 201,000 jobs in August, ADP Employer Services said yesterday, exceeding the 140,000 gain predicted by economists in a separate Bloomberg survey.

Fed Meeting

The policy-setting Federal Open Market Committee meets Sept. 12-13. Fed Chairman Ben S. Bernanke said on Aug. 31 at a conference in Jackson Hole, Wyoming, that the costs of “nontraditional policies” appeared manageable when considered carefully. He said he wouldn’t rule out steps to lower a jobless rate he described as a “grave concern.”

“Whether the Fed chooses to use this firepower again next week will depend on a careful assessment of the costs as well as benefits,” Deutsche Bank AG analysts including chief economist Peter Hooper in New York, wrote in an e-mailed note. “Because the economic picture is still improving, at least modestly, we feel that the Fed should and probably will limit its actions next week to verbal easing.”

The U.S. central bank has kept its benchmark interest rate in a range of zero to 0.25 percent since December 2008 and has pledged to maintain that level through late 2014. The Fed has purchased $2.3 trillion of bonds from 2008 to 2011 in two rounds of so-called quantitative easing to stimulate the economy through lower borrowing costs.

‘Higher Chance’

“Our main scenario envisages a higher chance that the Fed will extend its low-rate commitment,” said Shinichiro Kadota, a strategist at Barclays Plc in Tokyo. “If the Fed extends the pledge to mid- or end-2015, it will weigh on short-term yields up to five years.”

The ECB’s bond-buying plan will focus on government notes with maturities of one to three years, Draghi said yesterday at the central bank’s policy meeting in Frankfurt. The ECB will only intervene in the secondary market if a country has asked Europe’s bailout fund to buy its debt, ensuring strict conditions are agreed to, he said.

The Stoxx Europe 600 Index of shares gained 0.4 percent and the euro strengthened 0.6 percent to $1.2699. Germany’s 10-year bund yield climbed six basis points to 1.62 percent, while Spanish 10-year yields dropped below 6 percent for the first time in four months.

Volatility Index

Bank of America Merrill Lynch’s MOVE index, which measures price swings based on Treasury options, climbed to 71 basis points yesterday, the highest since Aug. 17. The average over the past five years is 112.

The U.S. central bank is scheduled to sell as much as $8 billion of Treasuries today due from February 2013 to February 2014 as part of so-called Operation Twist, a program to swap shorter-term securities in the Fed’s holdings with longer-term debt to put downward pressure on borrowing costs.

The Treasury will auction $32 billion of three-year notes on Sept. 11, $21 billion of 10-year debt the next day and $13 billion of 30-year bonds on Sept. 13.

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