Treasuries Fall After U.S. Jobless Claims Decrease

Treasury 10-year note yields increased from almost a six-week low as reports showed claims for unemployment benefits in the U.S. unexpectedly declined last week, showing progress in the labor market.

Treasuries fell for the first time in five days as investors prepared to bid for $29 billion of seven-year notes today. Ten-year yields have dropped since the Federal Reserve last week maintained its policy of buying $85 billion of debt a month to put pressure on borrowing costs. President Barack Obama and congressional Republicans were deadlocked over the budget in a confrontation that risks a government shutdown.

“The claims number looks good,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets, one of the 21 primary dealers that trade directly with the central bank. “It’s hard to apply any negative spin to this number.”

The benchmark 10-year note yield rose one basis point, or 0.01 percentage point, to 2.64 percent at 11:35 a.m. New York time, Bloomberg Bond Trader prices show. The yield, which reached a two-year high of 3.01 percent on Sept. 6, touched 2.61 percent yesterday, the lowest level since Aug. 12, amid bets U.S. budget talks won’t avert a government shutdown. The price of the 2.5 percent security due in August 2023 fell 3/32, or 94 cents per $1,000 face amount, to 98 25/32.

The Bloomberg U.S. Treasury Bond Index has risen 0.9 percent this month. It is little changed this quarter and down 2.4 percent for 2013.

Higher Volatility

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index rose yesterday for the first time in 11 days, increasing 0.6 percent to 75.3, above the 2013 average of 71.86. It climbed on Sept. 5 to 114.19, a two-month high.

“We ran a long way from where we were before the non-tapering Fed,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We’re stuck in the Washington watch, and it’s going to be with us for a couple of weeks. The market probably stretched a little too far with supply still on us.”

Jobless claims decreased by 5,000 to 305,000 in the week ended Sept. 21, a Labor Department report showed today in Washington. An official at the agency said there were no special factors and California has caught up with a recent backlog of new applications stemming from a computer system changeover. The median forecast of 49 economists surveyed by Bloomberg called for an increase to 325,000.

Congress hasn’t passed a budget for the 2014 fiscal year, which starts Oct. 1. The House and Senate are at odds over using the measure to stop funding the health-care law, and the lack of an agreement could lead to a government shutdown on Oct. 1.

Bill Rates

Rates on Treasury bills maturing close to the deadline for raising the borrowing ceiling increased. Rates on bills due Oct. 24 rose to 0.04 percent, the most on a closing basis since Aug. 19. The rate on bills due Oct. 31 has held within four basis points of zero during the period.

That’s different than two years ago, when one-month bills jumped to 0.18 percent on July 29, 2011, the highest since February 2009, as Congress pushed to the Aug. 2, 2011, deadline set by Treasury to avoid a default.

The rate on three-month Treasury bills dropped today to as low as negative 0.005 percent, the first time below zero since December 2012, before trading at zero.

“People are selling one-month bills to buy three-month bills to get out of the window of likely delayed payments due to a mishap on the debt ceiling,” said Ira Jersey, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG.

Note Auction

The seven-year notes being sold today yielded 2.045 percent in pre-auction trading, compared with 2.221 percent at the previous auction on Aug. 29, the highest level since July 2011. Investors bid for 2.43 times the amount offered last month, versus 2.54 at the July auction.

A five-year note sale yesterday drew 2.67 times the total available, the highest bid-to-cover ratio since May. The U.S. sold $33 billion of two-year debt at a yield of 0.348 percent, below a forecast of 0.354 percent in a Bloomberg News survey.

The sales this week, along with last week’s $13 billion 10-year Treasury Inflation Protected Securities auction, will raise $47.7 billion of new cash, as maturing securities held by the public total $62.3 billion, according to the Treasury.

Investors bid $2.88 for each dollar of the $1.589 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.

‘Policy Mistakes’

Fed Bank of Richmond President Jeffrey Lacker, who voted repeatedly last year against expanding stimulus, said today the Fed’s $3.72 trillion-dollar balance sheet and interest-rate guidance increases the risks and the costs of policy errors. Stein gave a speech in Frankfurt, Germany.

“My concern is that the combination of forward guidance and a very large balance sheet has raised the likelihood of policy mistakes going forward, and also has raised the cost of such mistakes, should they occur,” Lacker said in a speech at the Swedbank Economic Outlook Seminar in Stockholm.

The central bank refrained from tapering its bond buying after a Sept. 17-18 policy meeting, saying it needs more evidence of lasting improvement in the economy. The Fed purchased $1.57 billion today of Treasuries due from February 2036 to August 2043 as part of the program.

A Commerce Department report today showed gross domestic product rose at a 2.5 percent annualized rate, unrevised from the previous estimate, after expanding 1.1 percent in the first quarter. The median forecast of economists surveyed by Bloomberg was a 2.6 percent pace.

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