Treasuries fell, with 10-year yields rising from the lowest level in two months, as orders placed with U.S. factories increased in February, damping demand for haven assets.
Benchmark 10-year yields climbed before a government report this week that economists said will show the U.S. is adding jobs without driving wages higher. The yields earlier slipped below their 100-day moving average. Morgan Stanley is forecasting less implied volatility in Treasuries based on market perception of Federal Reserve policy. Two Fed regional presidents voiced support for continued stimulus spending by the central bank.
“It’s the anticipation that the number on Friday will be a bit stronger than the estimates,” said Thomas di Galoma, a managing director at Navigate Advisors, a brokerage for institutional investors in Stamford, Connecticut. “We’re in a fairly tight range of 1.80 to 2 percent.”
The 10-year yield rose three basis points, or 0.03 percentage point, to 1.86 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It earlier dropped to 1.82 percent, the lowest since Jan. 24, below the 100-day moving average at 1.83 percent. The 2 percent note due in February 2023 fell 1/4, or $2.50 per $1,000 face amount, to 101 1/4.
The 10-year yields will climb to 2.31 percent by year-end, according to a Bloomberg survey of economists.
Atlanta Fed Bank President Dennis Lockhart said the central bank will probably need its asset-purchase program, now at $85 billion of Treasury and mortgage debt a month, into next year to boost jobs.
“The decision to curtail asset purchases ought to be forward-looking, and in my judgment, that point could come later this year or early next year without harm to the momentum of the economy,” Lockhart said today in a speech in Birmingham, Alabama.
Fed Bank of Minneapolis President Narayana Kocherlakota said U.S. policy makers can spur economic growth by clarifying the conditions that would prompt a slowing or halt to the Fed’s asset purchases.
“Monetary policy should be more accommodative,” he said in a talk in Grand Forks, North Dakota today.
The Fed purchased $1.575 billion today in notes maturing between February 2036 and February 2043.
Morgan Stanley is forecasting less implied volatility in Treasuries based on the market’s evolving understanding of when the Fed is likely to reduce the amount of accommodation it’s providing to financial markets, firm strategists Matthew Hornbach and Ankur Shah said in a note to clients published today.
Investors should look at longer-term changes in labor market data rather than at each specific report on nonfarm payrolls or initial jobless claims in assessing when the Fed is likely to reduce the aid it is providing, the New York-based strategists wrote.
The decline in volatility as investors pay less attention to each piece of data should push the gap between yields on Treasury maturing in seven and 30 years wider, as well as widening the gap between 10-year and 30-year government debt yields, Hornbach and Shah wrote.
Investors demanded the highest yield premium to own 30-year bonds instead of 10-year notes in 18 months. The spread widened to as much as 1.26 percentage points yesterday, the widest since September 2011. It was 1.24 percentage points today.
The gap contracted 10 percent on Sept. 21, 2011, when the Fed announced Operation Twist to buy longer-term Treasuries and sell shorter-term debt from its holdings to put downward pressure on borrowing costs.
Treasuries due in a decade or more have been trading at almost the cheapest level in 19 months relative to global peers with comparable maturities, according to Bank of America Merrill Lynch bond indexes. Yields on the Treasuries reached 57 basis points higher than those in an index of other sovereign debt on March 25, the most since August 2011, the data showed. The spread was 51 basis points yesterday.
Trading volume rose to $183.5 billion as of 4:01 p.m. in New York after falling yesterday to $165.3 billion, the lowest level since Dec. 31, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. It touched a 2013 high of $491 billion on Feb. 1. Average daily volume this year is $282.6 billion.
“Everyone is waiting for the payroll number to give us some direction,” Sean Murphy, a trader at primary dealer Societe Generale SA in New York, said before the manufacturing report. “Until then we will continue to chop around in this range -- the range as I see it is 1.85 to 2.09.”
Factory orders rose 3 percent in February, the biggest gain in five months, following a revised 1 percent decline in the prior month, a Commerce Department report showed today in Washington. The median forecast of 64 economists in a Bloomberg survey called for a 2.9 percent rise.
U.S. employers hired 199,000 workers in March, after adding 236,000 in February, according to another Bloomberg survey before the Labor Department report on April 5.