Treasury Traders Boost Inflation Outlook Amid Employment Gains

  • Break-even rate rises for ninth day to highest since Jan. 6
  • Central bank 2016 rate move more likely as outlook brightens

Treasury traders pushed inflation expectations to the highest level in almost two months after a private report showed companies in the U.S. added more jobs than forecast in February, backing speculation the Federal Reserve will raise interest rates this year.

The 10-year break-even rate, which measures the difference between yields on benchmark Treasuries and equivalent inflation-protected securities, rose for a ninth day as oil prices climbed to the highest since January. Yields on two-year notes, the maturity most sensitive to Fed policy expectations, touched the highest in more than a month.

Inflation expectations are rebounding after falling last month to the lowest level since the financial crisis as equities and crude prices plunged. Benchmark 10-year notes started March with their biggest selloff this year after a manufacturing report on Tuesday exceeded forecasts, diminishing concern that slowing global growth will force the U.S. into a downturn. Data from the ADP Research Institute in Roseland, New Jersey, showed gains in the job market, as investors added to wagers that the Fed will tighten policy this year.

"The move has been pretty substantial," said Larry Milstein, managing director of government-debt trading at R.W. Pressprich & Co. in New York. The ADP report "gives optimism we’ll continue to see improvement in the employment picture. We’ve had a repricing of expectations for the Fed and for inflation."

Treasury 10-year note yields rose two basis points, or 0.02 percentage point, to 1.84 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield touched the highest on an intraday basis since Feb. 5. The 1.625 percent security due in February 2026 fell 1/8, or $1.25 per $1,000 face amount, to 98 1/32. Yields climbed nine basis points Tuesday, the biggest jump since Dec. 14.

Fed Odds

The 10-year break-even rate rose two basis points to 1.52 percent, the most since Jan. 6. The two-year note yield was little changed at 0.84 percent after touching the highest on an intraday basis since Jan. 27.

The probability the Fed will raise rates this year is about 66 percent, futures prices compiled by Bloomberg indicate. The figure has climbed from as low as 11 percent in February. Of 59 economists surveyed by Bloomberg, 49 predict the Fed will leave the upper end of its target band for the federal funds rate at 0.50 percent in its March meeting. The remaining 10 forecast it will increase the figure to 0.75 percent.

Beige Book

Fed officials lifted rates in December for the first time in almost a decade and signaled four increases this year. Policy makers meet March 15-16.

Deutsche Bank AG, one of the Wall Street firms that trade directly with the Fed, says U.S. policy makers should lift rates this month if the latest economic figures are any guide.

“If the Fed is truly data dependent then they should be raising rates at their next meeting,” Torsten Slok, the chief international economist for the company in New York, wrote in a report Tuesday. Manufacturing, factory jobs, consumer spending and inflation are all improving, according to the report.

The Fed’s Beige Book, released Wednesday, showed the U.S. economy continued to expand across most of the country, while wage growth was described as varying widely, “from flat to strong.” Seven of the Fed’s 12 regional districts characterized the economy as growing “moderately,” at a “modest pace” or “slightly,” according to the survey, which is published eight times a year.

Interest-rate forecasts the Fed is set to publish after its March meeting could differ “slightly” from those issued at the end of last year, according to San Francisco Fed President John Williams. There “could be a tweak here or there” in projections known as the dot plot, Williams told reporters Wednesday in San Ramon, California.

The U.S. added 214,000 jobs last month, after economists surveyed by Bloomberg called for an advance of 190,000, figures from the ADP Research Institute showed Wednesday. A Labor Department report March 4 is forecast to show the U.S. gained 195,000 jobs in February, according to a Bloomberg survey of economists.

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