Treasury Yields Reach 2-Year High as Job Gains Boost Taper Bets

Treasury yields rose to the highest in almost two years as the U.S. added more jobs than forecast for a third month, boosting bets the Federal Reserve will begin curbing the pace of its bond purchases as soon as September.

The yield on the benchmark 10-year note climbed the most since August 2011 after a Labor Department report yesterday showed the economy added 195,000 jobs in June, compared with the median forecast of 165,000 in a Bloomberg News survey. Fed Chairman Ben S. Bernanke said last month policy makers may “moderate” their asset-purchase program later this year and may end it mid-2014 if economic growth meets forecasts. The Treasury will sell $66 billion of securities next week.

“You got a number that basically gave the Fed the green light,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “It’s a massive selloff, and I’m not sure it’s going to be over soon with supply coming next week.”

The benchmark 10-year note yield rose 25 basis points, or 0.25 percentage point, to 2.74 percent this week in New York, according to Bloomberg Bond Trader prices, closing at the highest level since August 2011. The price of the 1.75 percent security due in May 2023 fell 2 2/32, or $20.63 per $1,000 face amount, to 91 1/2.

The yield on the 30-year bond rose 21 basis points to 3.71 percent.

‘Genie’s Out’

“Now that the genie’s out of the bottle, what you don’t want to do is sell into the teeth of selling pressure in the market,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney.

Flanagan forecasts that the 10-year yield will end 2013 at 2.75 percent, and said that investors who want to sell government debt may have opportunities to do so at somewhat lower yields.

“It’s great to see payrolls at 195,000,” he said, “but the broader economic setting is still not a very robust one.”

U.S. gross domestic product expanded at a revised 1.8 percent annualized rate from January through March, down from a prior estimate of 2.4 percent, the Commerce Department said June 26. The economy will grow 1.9 percent for 2013, according to the median forecast of 86 economists in a Bloomberg News survey in June, down from last year’s 2.2 percent increase.

The unemployment rate for June remained at 7.6 percent compared with the Bloomberg News survey of economists forecast of 7.5 percent. The economy has added an average of 189,000 jobs this year through May, the fastest pace since 2005 when it created 207,000 positions per month, Labor Department data show.

‘Taper Trail’

“It is a strong report that does keep the Fed on the taper trail,” Tony Crescenzi, executive vice president at Newport Beach, California-based Pacific Investment Management Co., said of the employment data yesterday on Bloomberg radio.

Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said the Federal Open Market Committee will begin tapering its $85 billion-a-month buying program sooner than they had expected after today’s Labor Department report.

An improving economy is also dimming the lure of bonds as a haven. The Conference Board’s Consumer Confidence index rose in June to 81.4, exceeding all forecasts in a Bloomberg survey and the highest since January 2008, the New York-based private research group said June 25. Home prices have increased 12 percent since April 2012, according to the S&P/Case-Shiller Composite index.

Consumer Confidence

“The labor market has continued to improve,” Bernanke said at his June 19 press conference. “Job gains, along with the strengthening housing market, have in turn contributed to increases in consumer confidence and supported household spending.”

The 30-year swap spread moved above zero in a continuation of the rise that has taken place over the past year as Dodd-Frank Act regulations increased costs for swap transactions and made Treasury securities an attractive alternative.

The spread was 2.75 basis points, after being as much as negative 12 basis points on June 19.

European Central Bank President Mario Draghi pledged yesterday to keep interest rates at a record low for an “extended period.”

A measure of demand at the U.S. Treasury Department’s debt auctions has fallen this year to the lowest level since 2009 as a drop in bond prices generates the biggest losses on government securities in four years.

Investors bid $2.94 for each $1 of the $1.077 billion of notes and bonds sold by the Treasury this year, compared with a record high $3.15 of bids last year. It’s the first decline in demand at the auctions since 2008, when the U.S. government increased note and bond offerings 59 percent to $922 billion as the recession and the financial crisis deepened.

The U.S. will sell $32 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year notes on three consecutive days starting July 9.

Before it's here, it's on the Bloomberg Terminal.