Treasuries Drop for First Time in Three Days Before Jobs

Treasury 10-year notes fell for the first time in three days before a government report that analysts said will show the job market in the world’s biggest economy improved in January.

The benchmark 10-year yield approached the highest level since April before separate data forecast to show manufacturing quickened last month and consumer confidence was higher than first estimated. Treasuries handed investors a 1 percent loss last month, according to Bank of America Merrill Lynch indexes. The MSCI All-Country World Index of shares gained 4.5 percent. The difference was the most since February.

“The jobs data is going to be what drives the market today,” said Owen Callan, an analyst at Danske Bank A/S in Dublin. “If we get a good number, Treasuries could sell off quite aggressively. If a reasonable recovery takes place in the U.S., we could see yields climb toward 2.25 percent.”

U.S. 10-year yields rose two basis points, or 0.02 percentage point, to 2 percent at 7:29 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due November 2022 dropped 5/32, or $1.56 per $1,000 face amount, to 96 21/32. The rate climbed to 2.03 percent on Jan. 30, the highest level since April 25.

U.S. Jobs

U.S. employers hired 165,000 workers last month, the most since August, following a 155,000 gain in December, according to the median forecast of 90 economists surveyed by Bloomberg News before today’s release at 8:30 a.m. in Washington. The unemployment rate in January held at 7.8 percent, where it’s been since November, a separate survey projected.

Data today showing a gain in Chinese manufacturing boosted speculation economic growth will quicken. A government report and a private index both showed manufacturing expanded in January.

Euro-area manufacturing output contracted less than estimated last month, adding to signs the 17-nation currency bloc’s economy is beginning to emerge from a recession.

A gauge of manufacturing in the 17-nation euro area rose to 47.9 from 46.1 in December, London-based Markit Economics said today. That’s above an initial estimate of 47.5 on Jan. 24.

“Bond-market sentiment is getting cold,” said Park Sungjin, the head of asset management at Meritz Securities Co. in Seoul, which oversees the equivalent of $7 billion. “The economic recovery is proceeding.”

Japan’s yen depreciated past 92 per dollar, its weakest level in 2 1/2 years, on speculation Prime Minister Shinzo Abe is close to choosing a new Bank of Japan governor who will boost stimulus to the economy to spur inflation.

Central Banks

Central banks in the U.S., Japan, and the U.K. have all bought bonds to spur growth.

“The current rise in yields is due to the Federal Reserve easing,” said Hiromasa Nakamura, a senior investor for Tokyo-based Mizuho Asset Management Co., which oversees the equivalent of $35.8 billion. “Investors expect money to go into riskier assets, and equity markets are rising.”

Meritz’s Park and Nakamura both said the tumble in Treasuries may not go much further. Park said he has a bet against bonds that he’s considering ending. Nakamura said economic growth is still weak enough to send yields lower.

Ten-year yields will drop to 1.83 percent by March 31, based on a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings. That would result in a return of more than 12 percent for investors who hold these securities during the period, according to data compiled by Bloomberg.

Bill Gross, manager of the world’s biggest bond fund, reiterated his warning that unprecedented central bank efforts to spur growth will result in higher costs for goods and services.

‘Eventual Inflation’

“Position for eventual inflation,” Gross wrote in his monthly investment outlook on Newport Beach, California-based Pacific Investment Management Co.’s website yesterday.

The U.S. 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was at minus 0.59 percent, the cheapest level since April 5, according to data compiled by Bloomberg. The measure dropped to a record minus 1.02 percent in July.

The Fed’s measure of inflation expectations for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, climbed to 2.89 percent. It hasn’t been so high since August 2011. The average last year was 2.61 percent.

The difference between yields on 10-year notes and same-maturity Treasury Inflation-Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.58 percentage points yesterday. That’s the most since October and compares with an average of the past decade of 2.19 percentage points.

“The end stage of a supernova credit explosion is likely to produce more inflation than growth,” Gross wrote.

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