Treasuries fell for a fourth day, the longest slump this year, as stronger-than-forecast employment gains added to signs that an unseasonably cold winter has failed to derail growth.
Ten-year note yields posted the biggest weekly advance in six months as Bill Gross, manager of the world’s biggest bond fund, said investors should “sell what the Fed has been buying.” The Federal Reserve has reduced its monthly bond purchases under the quantitative-easing stimulus strategy to $65 billion over the past two months from 2013’s $85 billion, citing an improving economy. Treasuries were the most attractive relative to their Group of Seven peers in almost four years.
“Everyone has been waiting for the bounce back from the weather and today’s data, and the move in Treasuries, has been a confirmation of that,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “We still have geopolitical uncertainty and such to deal with, but in general the market sentiment is one of higher rates as the weather effect wanes.”
The 10-year yield climbed five basis points, or 0.05 percentage point, to 2.79 percent at 5 p.m. in New York and touched 2.82 percent, the highest level since Jan. 23, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note maturing in February 2024 fell 14/32, or $4.38 per $1,000 face value, to 99 21/32.
Yields rose 14 basis points this week, the most since the five days ended Sept. 6. They last completed a four-day rally on Dec. 27.
The probability that the Fed will raise its benchmark overnight rate to at least 0.5 percent by the end of January 2015 increased to 15.4 percent today from 12.4 percent yesterday and from 10.3 percent a month ago, fed funds futures prices show.
Investors should “sell what the Fed has been buying because they won’t be buying them when Taper ends in Oct.,” Gross, manager of the $243 billion Total Return Fund at Pacific Investment Management Co., wrote in a comment on Twitter.
The Fed bought $1.225 billion of Treasuries yesterday due from November 2039 and August2042 under its quantitative-easing stimulus strategy to hold down borrowing costs and fuel economic growth. The central bank will purchase as much as $2.75 billion in notes on March 10, maturing from May 2021 to Feb. 2024.
In its December “Strategy Spotlight,” Pimco wrote that the Fed’s plans to keep interest rates low were more important than its decision to taper its bond purchase, and as such Pimco’s funds would bet on the shorter-term debt while pulling back from five-, 10- and 30-year exposures.
The 10-year yield is still below the 2014 high of 3.05 percent reached Jan. 2. The five-year average is 2.7 percent. The extra yield 10-year notes offer over G-7 peers climbed as high as 59 basis points, the most since April 2010.
Hedge-fund managers and other large speculators decreased their net-long position in 30-year bond futures in the week ending March 4 to the least since December, according to U.S. Commodity Futures Trading Commission data. Bets prices will rise outnumbered short positions by 16,858 contracts on the Chicago Board of Trade, the smallest since Dec. 27.
Net-long positions fell by 30,425 contracts, or 64 percent, from a week earlier, the Washington-based commission said.
Investors increased their net-short position in 10-year note futures, with speculative short positions outnumbering long positions by 101,370 contracts. Net-short positions rose by 88,403 contracts, or 682 percent, from a week earlier.
Treasuries were at the cheapest levels since Jan. 22, based on closing prices, according to the term premium, a Columbia Management model that includes expectations for interest rates, growth and inflation. The gauge was at 0.52 percent. A value of 0.50 percent to 0.75 percent is considered normal for a developed-market economy with slow inflation. The average over the past decade is 0.20 percent
Inflows to equity exchange traded funds are narrowing the gap with their fixed income counterparts as investors pulled $855 million out from exchange-traded funds of U.S. fixed income securities yesterday. That compares with the five-day average of $8.6 billion in outflows and a 20-day average of inflows of $676 million, suggesting a diminished appetite for debt, according to ETF data compiled by Bloomberg.
Investors are increasingly favoring ETFs investing in U.S. stocks, which took in $935 million on March 6, below the 20-day average of $2.01 billion, Bloomberg data show.
Inflows into fixed-income are still out-pacing inflows into U.S. equities as U.S. fixed-income ETFs have taken in $8.9 billion so far this year, compared with $5 billion in outflows from domestic equity funds, Bloomberg data show.
The 175,000 gain in employment followed a revised 129,000 increase the prior month that was bigger than initially estimated, Labor Department figures showed in Washington. The median forecast of economists in a Bloomberg survey called for a 149,000 advance in February. Unemployment rose to 6.7 percent from 6.6 percent as more people entered the labor force and couldn’t find work.
Severe winter weather has spawned a debate about how much of the drop-off from last year’s pace of job gains is attributable to a softening in the economy.
“The market was caught off guard with this number -- there was the expectation that the weather was going to impact this number adversely,” said Sean Simko, a money manager who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “It keeps the Fed on track with tapering.”
The Bloomberg U.S. Treasury Bond Index has added 1.9 percent this year as wavering risk appetite, a rout in emerging-market currencies and instability between Russia and Ukraine have boosted haven demand.
Fed policy makers’ decision to trim buying further at their January meeting showed they were sticking to their plan for a gradual withdrawal from the program, designed to cap long-term borrowing costs and spur growth, as the economy progresses. They said labor-market data were “mixed but on balance showed further improvement.”
The Fed left unchanged its statement that it will probably hold its target interest rate near zero “well past the time” that unemployment falls below 6.5 percent, “especially if projected inflation” remains below its longer-run goal of 2 percent. Policy makers meet on March 18-19.
The central bank’s preferred gauge of consumer prices rose 1.2 percent in January from a year earlier and hasn’t exceeded 2 percent since March 2012.