Treasuries Decline Most in 2 Months as Jobs Gain Fuels Fed ViewsCordell Eddings and Daniel Kruger
Treasuries fell the most in two months as reports showed the economy expanded in the third quarter beyond projections and added more jobs in October than forecast, boosting speculation the Federal Reserve is moving closer to a reduction of its $85 billion of monthly bond-buying.
Benchmark 10-year yields reached the highest level in seven weeks yesterday after payrolls grew by 204,000 in October versus the 120,000 median forecast of 91 economists in a Bloomberg News survey. U.S. debt rallied Oct. 7 after the European Central Bank cut its benchmark interest rate to a record to address prolonged price weakness. Treasury will auction $70 billion of notes and bonds next week.
“The Fed’s accommodation and the possibility of a taper comes right back up to the center of the market’s thinking,” said Kevin Giddis, head of fixed income in Memphis, Tennessee, at Raymond James & Associates Inc. “We believed this was a March event and now you’ve got to put it on the table for December. It puts pressure on the auctions next week.”
The benchmark U.S. 10-year yield rose 13 basis points this week, or 0.13 percentage point, to 2.75 percent in New York, Bloomberg Bond Trader data showed. The price of the 2.5 percent note due August 2023 lost 1 2/32, or $10.63 per $1,000 face amount, to 97 28/32.
The yield rose the most yesterday since July 5 on the way to the largest weekly move since the week ending on Sept. 6. The yield was at almost the three-month average of 2.71 percent, according to Bloomberg data.
Hedge-fund managers and other large speculators increased net-short position in 10-year note futures to the most since April 2012, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 189,188 contracts on the Chicago Board of Trade in the week ending Nov. 5.
The benchmark notes are at their cheapest level since Sept. 23, based on the 0.31 percent level on the so-called term premium, a valuation model used by the Fed that is calculated by using interest-rate expectations, economic growth and inflation. The gauge has averaged negative 0.04 percent this year, indicating the securities were overvalued. The security is considered at fair value at a term-premium level between 25 basis points to 75 basis points.
The difference between yields on two-year notes and 30-year bonds widened to 3.54 percentage points yesterday, the most since August. Historically, a steeper so-called yield curve reflects investors anticipating faster economic growth.
U.S. gross domestic product grew at an annualized 2.8 percent rate in the third quarter, exceeding forecasts for a 2 percent gain, the Commerce Department reported Nov. 7. The report along with yesterday’s payroll’s numbers, increased speculation the U.S. will be cutting back on stimulus as the ECB looks to intensify its accommodative policies.
“If the payrolls start to crank up, the market is going to be getting ready for the future action of the Fed,” said William Larkin, a fixed-income portfolio manager who helps oversee $500 million at Cabot Money Management Inc., in a telephone interview from Salem, Massachusetts. “We’re going to be data dependent, which means economic releases will have a heavy weight in market direction. There will be a lot more volatility as people trade out of positions.”
Yields rose after the Federal Open Market Committee said Oct. 30 that the economy showed signs of “underlying strength” even as policy makers agreed to continue the monthly bond purchases, known as quantitative easing.
Traders are pricing in a 22.4 percent probability that the Fed will raise its benchmark overnight rate by its January 2015 meeting, down from a 70.7 percent likelihood on Sept. 5, the day before the August payroll data was released. The Fed has kept its target rate unchanged at zero to 0.25 percent since December 2008.
“The market’s going to price in an earlier, versus late first quarter/early second quarter, taper,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “This was an October surprise,” he said, referring to the payrolls report.
The ECB cut it interest rate target to 0.25 percent, leaving just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB’s target and unemployment is at the highest level since the currency bloc was formed in 1999.
In the U.S., the Institute for Supply Management’s U.S. nonmanufacturing index increased to 55.4 in October, exceeding forecasts for 54 reading and up from 54.4 the prior month, a report from the Tempe, Arizona-based group showed Nov. 5. A report Nov. 1 showed Institute for Supply Management’s factory index rose to 56.4 in October, the highest since April 2011, from 56.2 a month earlier.
“Resilient is the word that comes to mind in regards to the economy,” said Paul Montaquila, fixed-income investment officer with BNP Paribas SA’s Bank of the West. “The proof is in the pudding that the shutdown didn’t really affect the number.”
The Treasury Department is scheduled to auction $30 billion in three-year notes Nov. 12, $24 billion in 10-year notes on Nov. 13 and $16 billion in 30-year bonds on Nov 14. The sales will raise $6.5 billion of new cash as maturing securities total $63.5 billion.