Treasury Yields Almost at 9-Month High Before Payrolls

Treasury 10-year note yields traded close to nine-month highs before a government report tomorrow forecast to show the U.S. added the most jobs in five months.

The benchmark yield declined after the Senate passed a measure to suspend the U.S. debt limit for three months, temporarily removing the risk of a government default. The yield fluctuated earlier as manufacturing in the U.S. expanded more than forecast even as claims for unemployment benefits unexpectedly increased. The Federal Reserve purchased $1.57 billion in securities after policy makers said yesterday they plan to keep buying $85 billion of bonds a month to boost growth.

“A 2 percent 10-year note is an equilibrium point given the current theme of active Fed, slow-growth scenario,” Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York, said in a telephone interview. “The direction from here will be a function of growth expectations, especially job-growth numbers, and tomorrow’s number will shed some light on what to expect.”

The benchmark 10-year yield fell one basis point to 1.98 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.03 percent yesterday, the highest since April 25. The price of the 1.625 percent security due in November 2022 rose 2/32, or 63 cents per $1,000 face value, to 96 26/32.

The debt-ceiling measure, crafted by House Republicans, will lift the government’s $16.4 trillion borrowing limit until May 19. The Senate cleared it 64-34 in Washington and will send the legislation to President Barack Obama.

Selloff Slows

Treasuries handed investors a 1.1 percent loss this month as of yesterday, set for the biggest decline since December 2010, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of shares gained 4.9 percent in the period including reinvested dividends.

The selloff slowed yesterday as the 10-year yield surpassed a technical level, with 2.03 percent above the so-called upper Bollinger band level of 1.99 percent, according to data compiled by Bloomberg.

Bollinger bands gauge volatility by plotting standard deviations above and below a moving average. Analysts use them to determine a probable range for a rate or security. Ten-year yields slid below the Bollinger level today.

Cheapest Level

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at the cheapest level since April. It touched minus 0.59 percent, the least expensive level since April 12, according to data compiled by Bloomberg. The measure dropped to a record minus 1.02 percent in July.

A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Employers added 165,000 jobs in January after a gain of 155,000 last month, according to the median forecast in a Bloomberg survey, the most since August. Another survey projects the unemployment rate to remain at 7.8 percent.

The MNI Chicago Report’s business barometer rose to 55.6 this month, the highest since April, after 50 in December. A reading of 50 is the dividing line between expansion and contraction. The median forecast of 48 economists surveyed by Bloomberg was 50.5.

The number “was a surprise to the upside -- it was worth a little down trade,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade directly with the Fed. “We’re looking forward to tomorrow’s payrolls report.”

‘Downside Risks’

Initial jobless claims rose 38,000 in the week ended Jan. 26, the most since Nov. 10, to 368,000, the Labor Department reported in Washington. Economists forecast 350,000 filings, according to the Bloomberg survey median. The increase followed a combined 45,000 drop in the prior two weeks.

U.S. government debt gained yesterday after the Commerce Department said the U.S. economy unexpectedly shrank in the fourth quarter and the Fed reiterated its commitment to asset purchases. It purchased notes maturing from February 2036 to November 2042 today.

The Federal Open Market Committee said in a statement yesterday that growth, while slowed by “transitory factors,” faces “downside risks” even after strains in global financial markets have eased. The expansion will pick up and unemployment will fall in response to “appropriate policy accommodation,” Fed officials said in a statement after a two-day meeting.

“The FOMC made it pretty clear the Fed would continue to buy through 2013,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc. “I wouldn’t be surprised to see us go through 1.90 percent on the 10-year over the next three or four trading sessions.”

The yield will fall to 1.83 percent by the end of the first quarter, according to the weighted average forecast of 79 economists in a Bloomberg survey.


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