Treasuries Drop as Weak Jobs Growth Can’t Derail Fed Taper View

Treasuries fell for the first time in three weeks, pushing 10-year note yields to a two-year high, on speculation economic growth has improved enough to make the Federal Reserve comfortable slowing bond purchases this month.

Benchmark yields breached 3 percent yesterday for the first time since July 2011 before a lower-than-forecast jobs report sent them plunging the most on an intraday basis since November. Fed policy makers are debating whether the pace of economic growth merits reducing the asset purchases they have made to support the economy and keep borrowing costs low. The Treasury Department sale of $63 billion in notes and bonds next week includes the smallest auction of three-year debt in four years.

“U.S. data has still been pretty good, and steadily improving even with the disappointing payroll news, and that has kept us in a rising-yield environment,” 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. “Although the data hasn’t been gangbusters, it’s been good enough for the Fed to justify tapering, which has weighed on the market.”

Benchmark U.S. 10-year yields rose 15 basis points, or 0.15 percentage point, to 2.93 percent this week in New York, Bloomberg Bond Trader data showed. The 2.5 percent note due in August 2023 fell 1 1/4, or $2.50 per $1,000 face amount, to 96 1/4.

Thirty-year bond yields advanced 17 basis points to 3.87 percent after reaching 3.90, the highest since Aug. 22.

Market ‘Correction’

U.S. government debt has lost investors 4.3 percent this year, which would be the biggest annual decline since data going back to 1978, according to Bank of America Merrill Lynch indexes.

The 14-day relative strength index for the Treasury 10-year yield dropped to 60 after reaching 69 on Sept. 5. A reading of 70 is a level that some traders see as a sign the market measure has risen too fast and may be due to reverse course.

“We’ve had such an aggressive run, and the market had priced in so much, that it was ready for a correction,” Kathy Jones, a New York-based fixed income strategist at Charles Schwab & Co., which has $2.12 trillion in client assets, said yesterday.

Benchmark yields rose seven basis points on Sept. 3 after the Institute for Supply Management’s factory index climbed to 55.7, the highest in two years, from the prior month’s 55.4, and compared with a forecast of 53.8 in a Bloomberg survey. A reading of 50 is the dividing line between expansion and contraction.

Jobs Report

The yield advanced to 3.005 percent yesterday only to drop 13 basis points after Labor Department figures showed payrolls in the U.S. climbed less than projected in August and gains for the prior two months were revised down.

The addition of 169,000 workers last month trailed the 180,000 median forecast in a Bloomberg survey of 96 economists. Unemployment fell to 7.3 percent, the lowest since December 2008, as workers left the labor force.

“The economy has been stuck in low gear for years and nothing seems to be breaking the paradigm of slow growth and slow job gains,” Jay Mueller, who manages about $2 billion of bonds at Wells Capital Management in Milwaukee, said yesterday.

Fed Decision

Minutes of the Federal Open Market Committee’s July meeting released on Aug. 21 showed members were “broadly comfortable” with Chairman Ben S. Bernanke’s plan to begin tapering purchases under its quantitative-easing program this year if the economy strengthens, with a few saying a reduction may be needed soon.

The Fed will reduce to $75 billion from the current $85 billion pace, according to the median estimate of 34 economists surveyed yesterday by Bloomberg News. The central bank will keep purchases of mortgage-backed securities at the current $40 billion per month pace, while cutting Treasury bond purchases to $35 billion per month, economists said.

The world’s biggest money manager agrees on the size of the cut, with the Fed trimming its monthly purchases of Treasuries by $10 billion, while leaving mortgage securities purchases as is, or cut each equally by $5 billion, according to Rick Rieder at BlackRock Inc.

“We continue to think QE tapering will come at the September meeting,” Rieder, chief investment officer for fundamental fixed income in New York for the firm with $3.86 trillion in assets, wrote in a note to clients. “Although with some weakness in the employment situation, the amount of tapering is likely to be lower than previously anticipated.”

Gross’s View

Bill Gross, manager of the world’s biggest bond mutual fund, said policy makers will go ahead with a plan to reduce the central bank’s unprecedented asset purchases even with the disappointing jobs report.

“I think Bernanke and company are committed to a taper,” Gross, co-founder Pacific Investment Management Co., said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene. “It will be taper ‘lite’ as opposed to a strong tapering.”

Fed funds futures show a 7 percent probability that the central bank will raise borrowing costs in January 2015 for the first time since the 2008 financial crisis.

Hedge-fund managers and other large speculators almost tripled their net-short position in 30-year bond futures in the week ending Sept. 3, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 8,963 contracts on the Chicago Board of Trade. Net-short positions rose by 6,478 contracts, or 261 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Debt Sales

For 10-year notes, speculative short positions fell by 7,731 contracts, or 7 percent, to outnumber long positions by 103,094 contracts.

The market is preparing for next week’s note sales as 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 have bid $2.87 for each $1 of the $1.257 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 Treasury Department is scheduled to auction $31 billion in three-year notes on Sept. 10, down from $32 billion and the least since January 2009. It will sell $21 billion in 10-year notes the next day and $13 billion in 30-year bonds on Sept. 12.

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