Treasuries fell, with yields rising to a seven-year high versus their developed-market peers, before a jobs report tomorrow forecast to show the U.S. economy is strengthening as major central bank policies diverge.
David Tepper, founder of $20 billion hedge-fund firm Appaloosa Management LP, called the bond-market rally “done” after the European Central Bank unexpectedly cut interest rates and pledged to buy asset-backed securities to spur economic growth while staving off the threat of deflation. The U.S. benchmark 10-year note yielded the most versus its Group of Seven counterparts since 2007 as European yields plunged.
“If you looked at the U.S. in a vacuum or a bubble, clearly bond yields should be higher,” Eric Stein, a money manager at Boston-based Eaton Vance Corp., said in a phone interview. Stein oversees about $13 billion. “Growth has picked up considerably.”
The U.S. 10-year yield rose five basis points, or 0.05 percentage point, to 2.45 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.375 percent note maturing in August 2024 fell 15/32, or $4.69 per $1,000 face value, to 99 11/32.
Thirty-year bonds led declines, with the difference between yields on five-year and 30-year debt reaching 151 basis points. The gap fell to 142 basis points on Aug. 28, the least since January 2009.
The yield on the 30-year bond rose seven basis points to 3.21 percent.
The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $452.6 billion, the highest since Aug. 1. That compares with $357.7 billion yesterday. This year’s average is $323.6 billion. Daily volume reached $504 billion on Aug. 1, the highest level in three months.
Treasuries returned 4.1 percent this year, after losing 3.4 percent in 2013, according to Bloomberg U.S. Treasury Bond Index. Bank of America Merrill Lynch’s Global Broad Market Sovereign Plus Index returned 5.3 percent, after losing investors 0.4 percent last year.
The ECB’s 24-member Governing Council reduced all three of its main interest rates by 10 basis points. The benchmark rate was cut to 0.05 percent and the deposit rate was lowered to minus 0.2 percent. A reduction in the benchmark rate was predicted by just six of 57 economists in a Bloomberg News survey.
The central bank will “purchase a broad portfolio of simple and transparent securities” and euro denominated covered bonds, ECB President Mario Draghi said at a press conference in Frankfurt.
“Draghi wants inflation in the euro zone -- he will not stop,” Tepper, 56, said in a telephone interview. “It’s the beginning of the end of the bond-market rally.”
In May, the billionaire warned attendees at a conference in Las Vegas that he was nervous about financial markets because the economy isn’t expanding fast enough and the ECB was struggling to revive growth. He said the ECB was “really far behind the curve” and should boost its stimulus program.
Two-year rates were negative in Austria, Belgium, Finland, France and the Netherlands, as well as non-euro-area nations Denmark and Switzerland after the ECB cut rates, according to data compiled by Bloomberg. Ten-year rates in Ireland and Italy dropped to record lows.
The difference between the U.S. 10-year note yield and the comparable German bund was at 148 basis points after touching 149 basis points on Sept. 2, the widest since June 1999.
Bund yields are unlikely to receive a further boost, Peter Schaffrik, rates strategist at Royal Bank of Canada’s RBC Capital Markets unit, wrote in a note to clients. The yield gap between U.S. Treasuries and bunds should widen significantly further if U.S. rates eventually rise as bunds are unlikely to sell off sharply, according to RBC.
Euro-area government securities returned 9.7 percent this year through yesterday, Bloomberg World Bond Indexes show. Spain’s have earned 13 percent, France’s 8.4 percent and Germany’s 6.9 percent.
“They’re creating a rate environment that, notwithstanding today’s rise in Treasury yields, will apply something of a cap to any increase in yields,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York.
The Bank of Japan finished its meeting today by maintaining its record debt purchases of 60 trillion yen ($572.4 billion) to 70 trillion yen a year.
Futures contracts indicate traders are betting the Fed will raise interest rates in the U.S. next year. Traders see a 55 percent chance the central bank will raise the benchmark interest rate target to at least 0.5 percent by July.
The central bank said today it planned a series of fixed-rate offerings of term deposits beginning in October as it tests a facility designed to help it eventually raise interest rates. Policy makers have kept their target for federal funds, the rate banks charge each other on overnight loans, at zero to 0.25 percent since 2008.
A private report today showed companies hired 204,000 workers in August, following a 212,000 gain the prior month that was smaller than initially estimated, according to figures from the Roseland, New Jersey-based ADP Research Institute. The median forecast of 43 economists surveyed by Bloomberg called for an August advance of 220,000.
A report tomorrow is forecast to show the U.S. added 230,000 jobs last month, compared with 209,000 in July, according to a Bloomberg News survey.
“U.S. investors will be looking at U.S. data and if it continues to improve, the market will slowly move higher” in yields, said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania.