Treasuries fell, pushing 10-year yields to a three-week high, as gains in U.S. factory orders and company hiring fueled bets the economy is improving enough for the Federal Reserve to raise interest rates next year.
Yields on 30-year bonds increased for a fourth day, the longest stretch in almost two months, before a government report on April 4 that’s forecast show the economy added 200,000 nonfarm jobs in March, the most in four months. Long-bond yields fell last week to the lowest since July. Traders increased wagers the Fed will raise rates in June 2015.
“The market is pricing in a higher and higher nonfarm payroll number,” said Donald Ellenberger, who oversees about $10 billion as head of multisector strategies at Federated Investors in Pittsburgh. “We should get a decent bounce-back on Friday.”
The 10-year note yield climbed five basis points, or 0.05 percentage point, to 2.80 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It reached 2.81 percent, the highest level since March 7, after touching 2.66 percent on March 27. The price of the benchmark 2.75 percent security due in February 2024 dropped 14/32, or $4.38 per $1,000 face amount, to 99 17/32.
Thirty-year bond yields increased four basis points to 3.65 percent after touching 3.49 percent on March 27. The last four-day advance ended Feb. 7.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 15 percent to $366 billion. The daily average this year is $345 billion.
Treasury prices extended losses after the Commerce Department said U.S. factory orders increased 1.6 percent in February following a revised 1 percent loss the previous month. Economists polled by Bloomberg forecast a 1.2 percent gain. U.S. companies added 191,000 jobs in March, versus a revised 178,000 in February, the ADP Research Institute in Roseland, New Jersey, reported. A Bloomberg survey projected 195,000.
“The data are really taking center stage,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that trade directly with the Fed. “Every big economic release is going to have good-size market implications because we’re getting away from the Fed on hold forever. The data becomes more important.”
The U.S. unemployment rate declined to 6.6 percent last month, from 6.7 percent in February, economists in a Bloomberg survey forecast before this week’s Labor Department report. Nonfarm payrolls increased, they projected, after employers added 175,000 jobs in February and 129,000 in January.
“The perception is that nonfarm payrolls are going to be higher than people estimated,” said Thomas di Galoma, head of fixed-income rates at ED&F Man Capital Markets in New York. “The market wants to sell off toward the 2.82 percent level on 10-year notes. That’s where we got to on the last nonfarm payroll number” on March 7.
U.S. government securities due in more than 12 months fell 0.3 percent in March, the biggest loss among 26 debt indexes around the world compiled by Bloomberg and the European Federation of Financial Analysts Societies. Greece was the best performer with a 5.4 percent rally.
Treasuries declined yesterday as a gauge of manufacturing boosted wagers the recovery in the world’s biggest economy is gaining momentum. The Institute for Supply Management’s index of U.S. manufacturing increased to 53.7 in March from 53.2 a month earlier, the Tempe, Arizona-based group reported. Readings above 50 indicate growth.
The central bank bought $2.3 billion of Treasuries today maturing from May 2022 to November 2023, according to the New York Fed’s website, under its quantitative-easing strategy to hold down borrowing costs and spur economic growth.
Fed Chair Janet Yellen said last month policy makers may end the bond purchases this fall and increase interest rates about six months later. She said March 31 that “considerable slack” in labor markets showed that the Fed’s accommodative policies will be needed for “some time.”
Federal funds futures traded on the CME Group Inc. Exchange showed a 61 percent probability today of an interest-rate increase at the central bank’s June 2015 meeting, versus a 48 percent chance a month ago.
The Fed has kept its target for fed funds, the interest rate banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008 to support the economy.
St. Louis Fed Bank President James Bullard said the central bank may need to raise the rate in the first quarter of 2015 as the economy improves. He said in a Bloomberg Radio interview he was “one of the more optimistic people” among policy makers.
Atlanta Fed Bank President Dennis Lockhart said in a speech in Miami a rate increase isn’t likely before the second half of 2015. He told reporters that reversing course on slowing bond purchases “requires a substantial deterioration of economic conditions which I certainly do not anticipate.”
Demand for inflation protection has declined since Yellen’s comments this week about accommodative policies.
Exchange-traded funds tracking U.S. inflation saw the biggest withdrawals yesterday since June. Traders pulled $134 million alone from the iShares TIPS ETF, the largest fund tracking Treasury Inflation Protected Securities, erasing 60 percent of the inflation bets accumulated in March, according to data compiled by Bloomberg. The fund saw inflows of $326.8 million in March.
The difference between yields on U.S. five-year notes and comparable TIPS, a gauge of the outlook for consumer prices over the life of the debt known as the break-even rate, touched 1.85 percentage points, almost the narrowest this year. It swelled to 2.03 percentage points on March 7 and averaged 1.91 this year.