Treasury Yield Is Quarter Point From Record Low

Treasury 10-year notes rose for a third day amid speculation reports this week will show the U.S. labor market is deteriorating, raising the odds the Federal Reserve will increase its bond purchases.

The advance pushed the 10-year yield to within two basis points of a three-week low. Demand for haven assets was sustained as Moody’s Investors Service said Spain’s banks face a capital shortfall that could climb to almost double the estimate the government provided last week. Former Fed Chairman Paul Volcker said the U.S. central bank’s latest mortgage-bond-buying program isn’t creating inflationary pressure.

“There’s so much demand for Treasuries,” said Kim Youngsung, the head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor. “If things slow down, they may buy Treasuries to bolster the U.S. economy. Inflation is stable,” said Kim, who helps oversee the equivalent of $101.5 billion at the company.

Benchmark 10-year note yields fell one basis point to 1.62 percent at 8:28 a.m. London time, based on Bloomberg Bond Trader data, after dropping to 1.61 percent. The 1.625 percent security due in August 2022 gained 1/16, or 63 cents per $1,000-face amount, to 100 1/16.

Yields fell to 1.60 percent on Sept. 28, the least since Sept. 7. They reached an all-time low of 1.38 percent on July 25. Kim said he would like to buy Treasuries if yields climb to 1.8 percent.

Labor Data

The U.S. jobless rate rose to 8.2 percent last month from 8.1 percent in August, according to the median forecast of 79 economists surveyed by Bloomberg News before the Labor Department report Oct. 5. Payrolls increased by 115,000 in September, less than the 139,000 average over the first eight months of the year, according to a separate survey.

A report tomorrow from ADP Employer Services will say U.S. companies hired 140,000 workers in September, versus 201,000 in August, a separate survey showed. Initial claims for jobless insurance rose last week, a government report due in two days will say, economists estimated.

The Fed said Sept. 13 that it will buy $40 billion of mortgage bonds a month until the U.S. sees what Chairman Ben S. Bernanke described as an “ongoing, sustained improvement in the labor market.” The central bank also said it will probably hold the federal funds rate near zero at least through mid-2015.

Inflation Expectations

Investors initially increased their inflation expectations on the Fed plan.

Bernanke yesterday defended his unprecedented debt purchases and said he is concerned that the economy isn’t adding jobs fast enough.

The difference between yields on 10-year notes and same-maturity Treasury Inflation-Protected Securities widened to 2.73 percentage points on Sept. 17, the highest level since May 2006. The rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, narrowed to 2.42 percentage points today.

“The basic situation is not an inflationary situation,” Volcker said yesterday in New York. The Fed’s latest bond-buying plan is “not going to have a profound effect on the economy and it’s not going to have any effect on inflation in the short run,” he said.

Fed Purchases

The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years. It plans to purchase as much as $2.25 billion of bonds maturing from February 2036 to August 2042 today as part of the program, according to Fed Bank of New York’s website.

Ten-year yields will fall and the Fed will increase its asset purchases in 2013, Carl Lantz, the New York-based head of interest-rate strategy for Credit Suisse Group AG, wrote in a report Sept. 27.

The central bank may begin 2013 with a monthly buying pace of $100 billion in securities, made up of $60 billion of Treasuries and $40 billion of mortgage bonds, according to Credit Suisse, one of the 21 primary dealers that trade directly with the Fed.

Manufacturing is an area of growth in the economy. The Institute for Supply Management’s factory index rose to 51.5 last month from 49.6 in August, the Tempe, Arizona-based group said yesterday. Readings above 50 show expansion, and the measure exceeded the most optimistic forecast in a Bloomberg survey.

Stocks Outperform

Bob Doll, an adviser to BlackRock Inc., the world’s biggest money manager with $3.56 trillion in assets, repeated his view that stocks will outperform Treasuries in the coming year.

“The positives outweigh the negatives,” Doll wrote yesterday on New York-based BlackRock’s website.

Spain’s lenders may need infusions of 70 billion euros ($90.4 billion) to 105 billion euros to absorb losses and still keep capital ratios above thresholds outlined in legislation last year, Moody’s analysts wrote yesterday in a report. That compares with the 53.7 billion-euro shortfall found last week after officials commissioned a stress test designed to lift doubts about the financial industry’s ability to withstand losses.

The Reserve Bank of Australia cut its benchmark interest rate today by 25 basis points, or 0.25 percentage point, to 3.25 percent, the lowest level since 2009. Prices of the nation’s key exports, iron ore and coal, have declined in recent months as Europe’s fiscal crisis weighs on global growth and Chinese demand.

Comparative Returns

Treasuries have returned 2.3 percent this year as of yesterday, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of shares gained 14 percent in the period, including reinvested dividends, data compiled by Bloomberg show.

Komal Sri-Kumar, chief global strategist at TCW Group Inc. a Los Angeles-based money manager that oversees $131 billion, likes bonds.

“High-grade fixed income is still the way to go” including Treasuries, he said today on Bloomberg Television’s “First Up” with Zeb Eckert. “You should take the latest ISM manufacturing number with a huge grain of salt.” Investors should also consider mortgage-backed securities and high-yield bonds, he said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE