Treasuries Close to Cheapest Level Versus Peers Since ’07

Treasuries were near the cheapest versus international peers in seven years before a jobs report that may signal whether the recovery is strong enough for the Federal Reserve to accelerate its tapering of stimulus.

Government securities due in a decade and longer yielded 1.20 percentage points more than non-U.S. sovereign debt as of yesterday, Bank of America Merrill Lynch data showed. The spread was 1.24 percentage points on Jan. 8, a level not seen since January 2007. The Citigroup Economic Surprise Index for the U.S. rose to 63.9 yesterday, the highest since February 2012, indicating that data are beating forecasts by the most in almost two years.

“The U.S. economy could surprise on the upside, hence the market can start to fret that the Fed could move sooner rather than later, and that’s a bearish backdrop for Treasuries,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “For now 3 percent seems to be holding. That suggests we need a much stronger-than-consensus number for that level to be broken decisively on the upside,” he said, referring to the 10-year yield.

Benchmark 10-year yields were little changed at 2.97 percent at 6:50 a.m. New York time, Bloomberg Bond Trader data show. The price of the 2.75 percent note due in November 2023 was 98 5/32. Treasuries fell 2.7 percent in the 12 months through yesterday, according to Bloomberg World Bond Indexes.

Ten-year yields may climb to 3.40 percent by June and reach 3.75 percent in December, RIA’s Stamenkovic said. The median of 64 analysts’ and strategists’ predictions compiled by Bloomberg is for the rate to end the year at 3.40 percent.

Labor Market

The Labor Department will say today that employers added 197,000 workers in December, versus 203,000 the previous month, according to the median estimate in a Bloomberg News survey of economists. The unemployment rate will hold at a five-year low of 7 percent, a separate Bloomberg survey showed.

The policy-setting Federal Open Market Committee, citing improvement in the labor market, said in December it will cut its monthly purchases of bonds to $75 billion from $85 billion starting this month.

Fed Bank of Minneapolis President Narayana Kocherlakota, who votes on monetary policy this year, said the central bank could achieve its goals of full employment and 2 percent inflation sooner by stepping up stimulus.

“By easing monetary policy relative to its current stance, the FOMC could facilitate a more rapid fall in unemployment and more rapid return to 2 percent inflation,” Kocherlakota said yesterday in the text of prepared remarks given in Minneapolis.

Fed Bank of Boston President Eric Rosengren, who doesn’t vote on policy this year, said Jan. 7 the central bank should cut stimulus “only very gradually.”

Inflation Indicator

While inflation has held in check, yields indicate expectations for costs in the economy are rising.

The Fed’s preferred inflation measure, the personal consumption expenditures index, showed prices rose 0.9 percent in the 12 months ended in November, the Commerce Department said Dec. 23. The gauge has been below the central bank’s 2 percent target for 19 months.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.31 percentage points today, the highest level since May. The average over the past decade is 2.22 percentage points.

Auction Demand

Treasuries gained yesterday as rising yields helped attract bidders at a $13 billion 30-year bond auction. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.57, the highest since October at the monthly sales.

The sale of 10-year notes on Jan. 8 drew the highest yield in 2 1/2 years, while the auction of three-year notes the previous day had the lowest demand since October.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, was $376.1 billion yesterday, more than the 2013 average of $308.4 billion.

Volatility rose this week to the highest level in a month. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries was 73.74 yesterday, after climbing to 75.28 on Jan. 8, the most since Dec. 5.

Signs of economic improvement led Allen Lei at Hontai Life Insurance Co. in Taipei to buy the bonds of Brazil, Russia, Turkey, the Philippines and Indonesia this month, he said.

“The U.S. economy is better, so I think other countries will follow,” said Lei, who help manage the equivalent of $6.2 billion of assets. “Spread product is more valuable than U.S. Treasuries.”

Lei said he purchased the Philippine 2024 bonds that were sold this week with a 4.2 percent coupon. The securities priced at 123.3 basis points over the 10-year Treasury yield.

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