Treasury Yields Rise From 5-Week Low Before Jobs Report

Treasury 10-year yields rose from the lowest level in five weeks before reports this forecast to show payrolls in the U.S. increased last month and services businesses kept growing.

The benchmark yields dropped earlier as Italy moved closer to a new election, boosting demand for the safest assets, after an anti-austerity vote last week left Europe’s third-largest economy in political deadlock. Pacific Investment Management Co., manager of the world’s biggest bond fund, projected returns on U.S. 10-year notes during the next 10 years will trail the average of the past decade.

Until the jobs report, “it’s going to be wait-and-see, with some movement of a couple of basis points on one side or the other,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “You have the European and Italian issues playing out in the background.”

Ten-year yields increased three basis points, or 0.03 percentage point, to 1.88 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield fell earlier to 1.83 percent, the lowest since Jan. 24. It slid 12 basis points last week, the most since the five days ended Aug. 31. The price of the 2 percent notes maturing in February 2023 declined 10/32, or $3.13 per $1,000 face amount, to 101 1/8.

Trading Range

The 10-year yield will trade between 1.85 percent and 1.9 percent before the payrolls report on March 8, Miller estimated. It has held between 1.83 percent and 1.91 percent since Feb. 26. A day earlier, it dropped as much as 11 basis points, the most since November, as polls signaled Italy might be left with a hung parliament.

Thirty-year bond yields rose four basis points today to 3.09 percent after falling earlier to 3.04 percent.

Trading volume fell to $182 billion today, the lowest level this year and the fifth straight daily decline, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily Treasury volume reached $491 billion on Feb. 1, the highest since August 2011. The average daily volume for 2013 is $301 billion, compared with $238 billion for 2012.

Treasury volatility as measured by the Bank of America Merrill Lynch MOVE index fell to 55 on March 1, the lowest level since Jan. 23. The gauge, which tracks the outlook for swings in U.S. government debt rates, has averaged 66.7 percent over the past year.

The Federal Reserve bought $1.46 billion of Treasuries today due from February 2036 to August 2042. It will purchase as much as $9 billion of Treasuries in three more operations this week, according to a schedule on the New York Fed’s website. The acquisitions are part of its purchases of $85 billion a month of Treasury and mortgage debt to support the economy.

Yellen, Bernanke

Fed Vice Chairman Janet Yellen, the Fed’s No. 2 official, said the central bank should continue its monthly bond buying while tracking the costs of the program. Yellen echoed in a speech in Washington Chairman Ben S. Bernanke’s comment last week that the benefits of the Fed’s historically low interest rates and near-record $3.09 trillion balance sheet outweigh any risk of financial instability. The benchmark rate target has been zero to 0.25 percent since 2008.

Bernanke, speaking March 1 in San Francisco, signaled he will keep the Fed’s target rate low to support the economy.

“Premature rate increases would carry a high risk of short-circuiting the recovery, possibly leading -- ironically enough -- to an even longer period of low long-term rates,” Bernanke said. “Only a strong economy can deliver persistently high real returns to savers and investors.”

U.S. government securities returned 0.6 percent in February, after losing 1 percent in January, according to Bank of America Merrill Lynch’s U.S. Treasury index.

Pimco Projections

U.S. 10-year notes are projected to deliver an average total return of 2 percent to 3 percent a year during the next decade, Saumil Parikh, a money manager and member of the investment committee at Newport Beach, California-based Pimco, wrote in an investment report. Adjusted for inflation, predicted by Pimco to rise 2 percent this year and 2.5 percent in 2014, the real yield on the 10-year note drops to zero to 0.5 percent.

The security returned an average of 5.3 percent during the past 10 years, according to a Bank of America Merrill Lynch index. The return was 4.2 percent in 2012, down from 20.1 percent in 2008.

“We expect the Federal Reserve to keep interest rates low for a very extended period of time, and that’s different from what the market expects,” Parikh said.

U.S. employers added 160,000 jobs in February, economists in a Bloomberg survey forecast before the Labor Department reports the data March 8. Payrolls grew by 157,000 positions in January. The unemployment rate stayed at 7.9 percent last month, economists estimated.

Services Report

The Institute for Supply Management’s non-manufacturing index, which covers almost 90 percent of the U.S. economy, was at 55 last month, versus 55.2 in January, the Tempe, Arizona-based group will report tomorrow, according to the median forecast of economists in a Bloomberg News survey. Readings above 50 signal expansion.

Treasuries rose earlier today as investors sought safety after a survey showed growth in China’s services industries slowed last month. In Rome, Stefano Fassina, a top aide to Democratic Party leader Pier Luigi Bersani, said Italy may need to hold another vote this year after passing new electoral laws.

Italian political instability, after last week’s election ended in a four-way split, threatens to reignite concern that Europe’s debt crisis will deepen. Italy may hold new elections this year if Bersani and his Democratic Party fail to find enough backing in parliament to form a government, Fassina, the group’s economic policy spokesman, told Sky TG24 TV yesterday.

In China, the non-manufacturing Purchasing Managers’ Index fell to 54.5 in February from 56.2 in January, the Beijing-based National Bureau of Statistics and China Federation of Logistics and Purchasing said in a statement yesterday.

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