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Treasuries Decline Most in 3 Months After Jobs Gains

Treasuries fell the most since March as U.S. employment growth returned to pre-recession levels and the European Central Bank lowered interest rates, sparking demand for the debt of the 18-nation region.

U.S. 10-year notes dropped as a report yesterday showed job gains accelerating this year at the fastest pace since 1999. Domestic retail sales increased in May for the fourth month, a report next week is forecast to show. Yields on Italian and Spanish bonds dropped to record lows yesterday after the ECB announced stimulus measures to ward off deflation. The U.S. is scheduled to sell $62 billion in notes and bonds next week.

There’s “more confidence in the sustainability of the economic recovery,” said Jennifer Vail, Minneapolis-based head of fixed-income research at U.S. Bank Wealth Management, which oversees $112 billion. “At this point, the market is mispricing the U.S. Treasury market. Yields are 25 to 50 basis points lower than where they should be.”

Benchmark 10-year yields rose 11 basis points, or 0.11 percentage point, on the week to 2.59 percent in New York, based on Bloomberg Bond Trader prices. The increase was the most since the week ended March 7. The price of the 2.5 percent security due in May 2024 dropped 31/32, or $9.69 per $1,000 face value, to 99 7/32.

Yield Curve

The difference between yields on U.S. two-year notes and 10-year debt, known as the yield curve, widened by eight basis points, the biggest weekly move since March 7, according to Bloomberg data. The gap widened to 2.18 percentage points from 2.1 percentage points last week.

The steepening of the yield curve suggests investors are betting faster growth will lead to higher long-term borrowing rates.

“The job growth seems to be embedded in the economy,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “We’re range-bound, given the global situation.” The range is 2.375 percent to 2.75 percent, he said.

Trades at the Chicago Board of Trade suggest a steeper yield curve is coming. Hedge-fund managers and other large speculators decreased their net-long position in 30-year bond futures and increased bets on a decline in 10-year notes in the week ending June 3, while betting on gains in two- and five-year Treasuries, according to U.S. Commodity Futures Trading Commission data.

Options Trading

Speculative long positions on 30-year bonds, or bets prices will rise, fell to 25,173 contracts, or 51 percent from a week earlier, the Washington-based commission said in its Commitments of Traders report. Bets that benchmark 10-year note prices will fall rose 127 percent to 43,295 contracts.

Traders reversed to a net-long position of 43,675 contracts from a short position of 45,647 contracts on five-year note futures, and increased a bet on gains in two-year securities by 8 percent to a net-long of 57,830 contracts.

The gap between yields on U.S. 10-year notes and similar maturity German bunds widened to as much as 1.24 percentage points yesterday, the highest level since July 1999, as ECB President Mario Draghi cut the deposit rate to minus 0.1 percent and said the bank will introduce new, “targeted” offerings of liquidity to banks to encourage them to lend money to the real economy. Officials will also start work on purchases of asset-backed securities, he said.

‘Receptive’ Market

The extra yield 10-year notes offer over their Group of Seven peers touched 70 basis points yesterday, the most since April 2010. Spain’s 10-year rate fell to a record 2.612 percent, the least since Bloomberg began compiling the data in 1993.

The average yield to maturity on government bonds from Greece, Ireland, Italy, Portugal and Spain fell to a record 2.12 percent June 5, according to a Bank of America Merrill Lynch. That’s down from a euro-era high of 9.55 percent in November 2011.

“The market was very receptive and it pushed yields down,” said William Larkin, a money manager who oversees $520 million in assets at Cabot Money Management in Salem, Massachusetts, referring to the ECB stimulus measures.

Futures prices put the likelihood the Fed will start raising borrowing costs by its June 2015 at 43 percent June 4, based on trading on the CME Group Inc.’s exchange. The chances of a Fed increase are 61 percent by its July 2015 meeting, the data show.

Treasuries dropped yesterday as jobs growth last month of 217,000 exceeded the 215,000 median forecast in a Bloomberg survey of economists. May marked the fourth straight month payrolls have increased at least 200,000, the first time that’s happened since September 1999 to January 2000. Unemployment was unchanged at 6.3 percent, an almost six-year low.

A report June 12 is forecast to show retail sales rose by 0.6 percent in May, up from 0.1 percent the previous month.

The U.S. is scheduled to sell $28 billion of three-year notes on June 10, $21 billion of 10-year notes the next day and $13 billion in 30-year bonds on June 12.

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