Treasuries Drop as Unemployment Rate Unexpectedly Falls

Treasury bond yields climbed to the highest level in two weeks after a report showing the U.S. unemployment rate unexpectedly fell added to concern the Federal Reserve’s pledge to sustain stimulus will spur inflation.

The difference in yields between 30-year bonds and inflation-protected securities increased to the most in almost three weeks after the Labor Department said unemployment fell to 7.8 percent in September, the lowest since President Barack Obama took office in January 2009. Fed policy makers said last month when they announced a third round of bond buying that they would continue to maintain stimulus measures even as the economy strengthened.

“The market would view it as a positive, and an inflationary story,” said Justin Hoogendoorn, a fixed-income strategist at Bank of Montreal unit BMO Capital Markets in Chicago. “The unemployment rate dropping to 7.8 percent was a big move. That’s a big headline print that can get things going, get people thinking that things are getting better.”

The yield on 30-year bonds rose eight basis points, or 0.08 percentage point, to 2.97 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data, the highest since Sept. 21. The 2.75 percent security due August 2042 declined 1 18/32, or $15.63 per $1,000 face amount, to 95 20/32.

Benchmark 10-year note yields rose seven basis points to 1.74 percent. The gap between the 10- and 30-year yields reached 1.24 percentage points, the most since Sept. 2011.

The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, for 30-year securities touched 2.56 percentage points, the highest since Sept. 18.

Lost ‘Luster’

The unemployment rate fell as employers took on more part-time workers. The rate, which dropped from 8.1 percent, was forecast to rise to 8.2 percent, according to the median estimate of 88 economists surveyed by Bloomberg. The economy added 114,000 workers last month after a revised 142,000 gain in August that was more than initially. The median estimate for job gains was 115,000, according to another survey.

“People are looking at the rate more than anything else,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, one of the 21 primary dealers that trade with the Fed. “They are saying it’s not as bad as they originally thought. It’s taken some luster out of the marketplace.”

The payrolls data comes a month before the U.S. presidential election. Employment and the economy are central themes in the campaign, with Obama and Republican challenger Mitt Romney each trying to convince voters they can best energize the expansion and create jobs. The jobless rate had stayed above 8 percent since February 2009.

Fed Moves

While reducing borrowing costs, the Fed hasn’t made steady progress toward meeting its mandate to achieve full employment.

Fed Chairman Ben S. Bernanke this week defended the central bank’s bond-buying program, saying officials will sustain record stimulus even after the domestic expansion gains strength. The Fed said on Sept. 13 it will keep the main interest rate near zero until at least mid-2015 and buy $40 billion of mortgage debt every month in a third round of so-called quantitative easing.

The central bank bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 in two rounds of purchases, known as quantitative easing. It also began its Operation Twist program to replace shorter-term debt in its portfolio with longer-term securities and put downward pressure on long-term borrowing costs.

‘Fragile Recovery’

“We’re in a fragile recovery,” said John Fath, a principal at the investment firm BTG Pactual in New York who helps manage $2.5 billion. “The bottom line is the Fed is going to be in here purchasing securities for a while.”

A private report Oct. 3 showed companies added more jobs than forecast. Employers added 162,000 jobs last month, ADP Employer Services data showed, compared with a forecast of 140,000 jobs in a Bloomberg News survey of economists.

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

Treasuries have gained 2.1 percent this year, according to Merrill Lynch indexes. Bonds returned 9.8 percent last year after gaining 5.9 percent in 2010, according to the index.

Ten-year yields will rise to 1.75 percent by December, according to the median forecast in Bloomberg surveys of banks and securities firms.

‘Higher Yields’

Hedge-fund managers and other large speculators increased their net-long position in 10-year note futures in the week ending Oct. 2, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 161,790 contracts on the Chicago Board of Trade. Net-long positions rose by 78,264 contracts, or 94 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

The U.S. will sell $66 billion in notes and bonds next week on three consecutive days beginning Oct. 9. It will auction $32 billion in three-year debt, $21 billion in 10-year securities and $13 billion in 30-year bonds, the Treasury announced yesterday.

“The market will turn its attention to next week’s supply,” said Ray Remy, head of fixed income in New York at the primary dealer Daiwa Capital Markets America Inc. “At these levels, the market has to go to higher yields.”

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