Treasury Yields Reach 11-Week High on Fed Bets Before Jobs Data

Treasury 10-year note yields touched an 11-week high as reports showing the economy expanded and weekly jobless claims fell added to speculation the Federal Reserve will slow bond purchases as soon as this month.

Bond prices declined for a second day after the Commerce Department said gross domestic product rose more than initially forecast in the third quarter. The drop in weekly claims comes a day before a report forecast by analysts to show the U.S. added jobs in November. Fed officials meet Dec. 17-18.

“The economy seems to be improving; the economic numbers have been on average better than expected,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Maybe that means taper is coming sooner rather than later, and that’s been weighing on the Treasury market.”

The benchmark 10-year note yield rose four basis points, or 0.04 percentage point, to 2.87 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The yield reached 2.88 percent, the highest since Sept. 18. The price of the 2.75 percent security due in November 2023 fell 10/32, or $3.13 per $1,000 face amount, to 98 30/32.

Yields on five-year notes added four basis points to 1.49 percent, the highest since Sept. 23. Thirty-year bond yields increased to 3.92 percent, a two-week high, before trading at 3.91 percent.

Yield Gap

The difference between yields on five- and 10-year Treasuries was 1.39 percentage points. It has increased from 1.22 percentage points at the end of October as improving economic data has led to increased speculation the Fed will taper bond purchases this month.

A gauge of volatility in Treasuries rose to an almost eight-week high. The Bank of America Merrill Lynch MOVE index increased to 76.1, the highest since Oct. 11. It reached a six-month low of 58.31 on Nov. 18. This year’s average is 71.52.

The Treasury said it will auction $64 billion of notes and bonds next week in three offerings: $30 billion of three-year debt, $21 billion of 10-year securities and $13 billion of 30-year bonds.

Labor Department data tomorrow will show the U.S. economy added 185,000 jobs last month and the unemployment rate fell to 7.2 percent, the lowest level since 2008, economists in Bloomberg surveys forecast. ADP Research Institute said yesterday U.S. companies hired 215,000 workers in November, more than the most optimistic forecast among economists surveyed.

‘Complete Undoing’

“We’re probably one good payroll number away from a complete undoing of the bond market where you’re going to re-trade 3 percent on a better-than-expected unemployment number,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “The perception that they’ll taper sooner rather than later will certainly be there.”

Yields on 10-year notes jumped as much as 16 basis points on Nov. 8 after the Labor Department reported that payrolls increased by 204,000 jobs in October, beating a Bloomberg survey’s forecast of 120,000.

The U.S. central bank buys $85 billion of bonds a month under its quantitative-easing strategy to push down borrowing costs and spur economic growth. It purchased $1.6 billion of Treasuries today due from November 2039 to August 2043 as part of the program.

‘Warrant Trimming’

Minutes of the Fed’s latest meeting released Nov. 20 said policy makers expected economic data to show improvement in the job market and “warrant trimming the pace of purchases in coming months.”

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said unprecedented monetary accommodation has lifted prices of stocks and bonds to levels that exceed measures of true value.

“And I think the Fed knows that and wants to diminish that effect to the extent that they can,” Gross said during an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “What they are going to do in terms of transition, we think, is simply to reduce quantitative easing to the point that by the end of 2014 they eliminate it, if they can.”

Rates on Treasury bills maturing on Jan. 23 and Jan. 30 fell below zero amid rising demand for short-term debt at year-end. The maturities are the closest ones to the expected end-date of the Fed’s reverse-repurchase-agreement facility, which is scheduled to run as late as Jan. 29.

“For balance-sheet reasons, people want to have short-term liquid investments” as the calendar year changes, said Thomas Simons, a government-debt economist in New York at the primary dealer Jefferies LLC.

Fed Facility

Simon said he doesn’t expect the situation to change unless the Fed makes its reverse-repo program permanent and increases the amount for which each individual counterparty can bid.

“That should set a floor under front-end rates,” he said.

Through the Fed’s current facility, counterparties can submit cash of as much as $1 billion overnight to the Fed in exchange for securities from the central bank’s holdings.

The Jan. 23 bill rate fell to as low as negative 0.015 percent before trading at zero. The Jan. 30 bill rate touched negative 0.01 percent before trading at 0.005 percent. Both rates rose to 0.09 percent on Oct. 15, the day before Congress agreed to end the political impasse over raising the nation’s debt ceiling.

U.S. GDP climbed at a 3.6 percent annualized rate, up from an initial estimate of 2.8 percent and the strongest since the first-quarter 2012. Initial jobless claims decreased 23,000 to 298,000 in the week ended Nov. 30, the Labor Department said today in Washington. A Bloomberg survey forecast an increase to 320,000.

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