Treasuries Are Little Changed Before U.S. Labor Market Report

Treasury 10-year notes were little changed, with yields at the highest in more than a week, before a government report forecast to show the U.S. jobless rate increased and payrolls expanded at a faster pace last month.

U.S. government securities still outperformed German bunds as a report showed Germany’s factory orders declined more than economists predicted in August, boosting demand for U.S. assets. The yield spread between 10-year notes and inflation-linked bonds was set to complete the second biggest weekly gain this year as inflation expectations rose.

“Overall, the Treasury market will remain well supported around current levels,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “We’d need a tremendous deviation from the consensus expectations to trigger a meaningful response in the market,” he said, referring to the forecasts for the unemployment rate and nonfarm payrolls.

The 10-year Treasury note yield added less than one basis point, or 0.01 percentage point, to 1.68 percent at 7:24 a.m. New York time, the highest level since Sept. 25. The 1.625 percent security due in August 2022 fell 3/32, or 94 cents per $1,000 face amount, to 99 15/32. The rate climbed six basis points yesterday, the most since Sept. 14.

Labor Data

U.S. unemployment rose to 8.2 percent last month from 8.1 percent in August, according to the median projection of economists surveyed by Bloomberg. Payrolls climbed by 115,000, less than the 139,000 average over the first eight months of the year, the report is also forecast to show. The Labor Department will issue the data at 8:30 a.m. in Washington.

The Federal Reserve unveiled a third round of so-called quantitative easing last month with open-ended purchases of $40 billion a month in mortgage-backed securities. The central bank bought Treasury and mortgage debt valued at $2.3 trillion in the first two rounds.

Policy makers are battling an unemployment rate that has topped 8 percent since February 2009, the longest stretch in monthly records dating back to 1948. The U.S. economy has so far recovered about 4.1 million of the 8.8 million jobs lost in the wake of the 18-month recession that ended in June 2009.

Demand for Treasuries will be sustained and yields will likely increase only “moderately” and reach 2 percent by year-end and 2.20 percent in the middle of 2013. That’s still more bearish than the median of 76 economists’ and strategists’ predictions compiled by Bloomberg, which see the rate reaching 2 percent in June.

Orders Fall

German orders, adjusted for seasonal swings and inflation, fell 1.3 percent from July, when they rose 0.3 percent, the Economy Ministry in Berlin said today. Economists forecast a 0.5 percent drop, according to the median of 31 estimates in a Bloomberg News survey.

Germany’s 10-year bund yield climbed four basis points to 1.48 percent.

Treasuries are “the ultimate safe-haven asset of the world’s reserve currency,” said Brian Barry, an analyst at Investec Bank Plc in London. “The payroll numbers are likely to dictate the direction of risk assets for the day.”

The yield gap between 10-year notes and similar-maturity inflation-linked bonds, a gauge of expectations for consumer prices, widened 20 basis points this week to 2.62 percentage points. It’s poised for the biggest increase this year after a gain of 27 basis points in the week ended Sept. 14.

Treasury Inflation-Protected Securities “seem to suggest that investors do not completely trust the Fed to deliver on its 2 percent inflation target,” Federal Reserve Bank of St. Louis President James Bullard said yesterday in a speech in Memphis, Tennessee.

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