Treasury Yield Spread Shrinks Amid Weak Jobs, Fed Buying

The yield difference between Treasury 10-year and 30-year debt has narrowed to almost the least since November after a smaller-than-forecast job gain in March indicated the Federal Reserve will keep purchasing debt to spur the economy.

Treasuries have been among the world’s best-performing bonds in the past month as Bank of Japan Governor Haruhiko Kuroda said last week he was increasing debt purchases to 7.5 trillion yen ($80 billion) a month to battle deflation. U.S. government securities due in 10 years and longer returned 6.2 percent from a month ago, according to indexes compiled by Bloomberg and the European Federation of Financial Bank of Analysts Societies. That was the third-biggest gain across 144 indexes covering bond markets worldwide.

“We seem to be seeing the spring slowdown in the data that should keep us in this lower-yield range,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse AG, one of 21 primary dealers that trade with the Fed. “The speculation that funds will flow in from Japan on the back of their easing measures is also keeping the market bid and the yield curve very flat.”

The benchmark 10-year Treasury yield rose three basis points, or 0.03 percentage point, to 1.75 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2023 fell 9/32, or $2.81 per $1,000 face value, to 102 9/32. The yield dropped to 1.68 percent on April 5, the lowest level since Dec. 12.

Jobless Rate

The yield spread between 10-year notes and 30-year bonds fell to 1.17 percent after touching 1.16 percent, the lowest since November, on Friday.

The increase of 88,000 U.S. jobs in March, smaller than the most-pessimistic forecast in a Bloomberg News survey of economists, gives Fed Chairman Ben S. Bernanke and his colleagues reason to press on with $85 billion in monthly bond purchases aimed at reducing unemployment.

The jobless rate fell to a four-year low of 7.6 percent from 7.7 percent, while average hourly earnings were unchanged, the Labor Department said on April 5.

Stocks fell from levels at almost record highs while the gap in yields between Treasuries and U.S. company bonds was little changed after the payroll data, according to Bank of America Merrill Lynch bond indexes. U.S. company bonds yielded 2.21 percentage points more than U.S. government debt of comparable maturity, the indexes show.

Treasury Auctions

The Treasury will auction $66 billion of notes and bonds this week, selling $32 billion in three-year notes tomorrow, $21 billion in 10-year debt the next day and $13 billion in 30-year bonds on April 11.

“People are trying to get a feel for what everyone else has to clean up while they take a look at their own positions,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “No one is aggressively selling Treasuries that they bought last week in order to move into other markets with momentum. We’ve got to take more time to absorb all the news of the last few weeks.”

Retail sales stagnated in March, after gaining 1.1 percent in February, based on a Bloomberg survey before the Commerce Department reports the figure on April 12.

The Federal Open Market Committee said in a March 20 statement it will continue its asset purchases until the labor market improves “substantially.” The committee makes its next policy decision on May 1.

‘Losing Steam’

“The U.S. economy is losing steam,” Jan Hatzius, chief economist at Goldman Sachs, wrote in note dated April 7. “The statement on May 1 is likely to look fairly dovish and the current $85 billion pace of purchases is very likely to continue for the time being.”

Bernanke is scheduled to speak at 7:15 p.m. in Atlanta at a conference on “Maintaining Financial Stability.”

Treasury yields show inflation expectations fell to the lowest level since January.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation-Protected Securities, a gauge of expectations for consumer prices over the life of the debt, shrank to 2.46 percentage points, the narrowest since Jan. 2.

Ten-year Treasury yields fell below their 200-day moving average of 1.74 percent on April 5.

Japan’s biggest investors are shunning their government’s bonds in favor of Treasuries, endorsing the policies of the Bank of Japan’s Kuroda to spark inflation and aiding Bernanke’s efforts to spur U.S. economic growth.

“We’ve had a significant move in Treasuries that may be too much,” said Michael Cloherty, head of U.S. interest-rate strategist at primary dealer Royal Bank of Canada’s RBC Capital Markets unit in New York. “There are widespread expectations of a dramatic change in capital flows from the Japan news, and I don’t think the change will be as pronounced into the Treasury market as many are expecting.”

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