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Treasuries Snap Four-Day Rally on Fed Minutes, Jobs Forecast

Treasury 10-year note yields rose for the first time in five days before a government report tomorrow that’s forecast to show job growth in the U.S. increased amid accommodative monetary policy from the Federal Reserve.

The benchmark securities fell as a government report showed U.S. initial jobless claims were lower than forecast, a sign the employment market may be recovering. They extended losses as Fed policy makers said risks in their latest bond-buying program are manageable, according to minutes from their most recent meeting. European Central Bank President Mario Draghi said the bank is ready to start buying euro-area government bonds after it left the key lending rate unchanged.

“The Fed is uber-dovish right now,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 21 primary dealers that trade with the central bank. “The Fed’s going to be very focused on its job creation given they feel they have a very strong hold on their inflation mandate.”

The yield on 10-year notes rose six basis points, or 0.06 percentage point, to 1.67 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 1.68 percent, the highest level in a week as it crossed its 50-day moving average of 1.6658 percent. The 1.625 percent security due August 2022 slipped 17/32, or $5.31 per $1,000 face amount, to 99 18/32.

Applications for jobless benefits increased 4,000 to 367,000 in the week ended Sept. 29, Labor Department figures showed today. The median forecast of 51 economists in a Bloomberg News survey was for a rise in initial jobless claims to 370,000.

Fed Minutes

“Most participants thought these risks could be managed since the committee could make adjustments to its purchases, as needed, in response to economic developments or to changes in its assessment of their efficacy and costs,” according to the Federal Open Market Committee’s record of its Sept. 12-13 meeting released today in Washington.

Fed Chairman Ben S. Bernanke and his policy-making colleagues announced the central bank will buy $40 billion a month of mortgage bonds in a third round of quantitative easing. The FOMC aims through its newest phase of record stimulus to spur economic growth and bring down an unemployment rate stuck above 8 percent for 43 months.

The central bank now holds $2.49 trillion of mortgages and Treasury securities, down from a peak of $2.54 trillion in September 2011. the central bank’s balance sheet totals $2.81 trillion, down from a high of $2.94 trillion in February.

‘Risk Off’

“We’re at the upper end of the range in prices and, with payrolls tomorrow, people are taking a little bit of risk off,” Charles Comiskey, head of Treasury trading at primary dealer Bank of Nova Scotia in New York. “Given the policies of quantitative easing and the weak economy, the market has basically stopped trading.”

Orders placed with U.S. factories fell 5.2 percent in August, the biggest drop in more than three years, following a revised 2.6 percent increase in July, the Commerce Department said today in Washington. The median forecast of economists in a Bloomberg News survey called for a decline of 5.9 percent.

Payrolls likely increased by 115,000 in September, the Labor Department may report tomorrow, according to the median forecast of 91 economists surveyed by Bloomberg. The jobless rate may have increased to 8.2 percent from 8.1 percent in August, according to the median forecast of 87 economists in a separate Bloomberg News survey.

‘Better Prepared’

Bearish sentiment was boosted as polls showed Republican challenger Mitt Romney won last night’s first presidential debate with President Barack Obama at the University of Denver, which featured the labor market as a key issue. Polls conducted in the debate’s immediate aftermath by CNN and CBS News both indicated voters, by margins of more than two-to-one, thought Romney had won the encounter.

Treasuries were weaker as investors speculated that a Romney victory would boost growth and undermine political support for the accommodative monetary policy of the Fed.

“The takeaway was Romney was better prepared,” said Sean Murphy, a trader at primary dealer Societe Generale SA in New York. Traders expect that, as president, Romney would continue to oppose additional central-bank asset purchases and take measures to foster growth, which “weighs on the back-end” because it implies a reduction in demand for the securities, Murphy said. “Guys like to read into it and say he’s not in favor of quantitative easing.”

Cheaper Debt

The U.S. government’s interest expense fell to the lowest in seven years as yields on Treasury debt dropped to records even as debt soared beyond $16 trillion for the first time, aided by a one-time accounting change.

The U.S. paid $359.8 billion in interest on $16.1 trillion of debt in the 12 months ended Sept. 30, according to the Treasury Department’s TreasuryDirect website. That’s down from $454.4 billion for the 2011 fiscal year and the least since $352.4 billion in fiscal 2005.

The fiscal 2012 interest bill was reduced by a change in Department of Defense accounting methods for market-based securities, a one-time adjustment of $75 billion for the month of July. Without the adjustment, the interest bill would have been the lowest since $414 billion in fiscal 2010.

“That reflects not only low interest rates, it also reflects important debt-management principles,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The Treasury has rebuilt its access across the debt spectrum” so that it can sell bonds without dislocating other borrowers.

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