Treasuries in Tightest Range in Month on Growth-Slowdown Signs

Treasuries traded in the tightest range in almost a month after reports showed U.S. companies expanded hiring at a slower-than-forecast pace and a services-industry index declined more than projected, adding to speculation that economic growth is stalling.

Benchmark 10-year note yields fluctuated after the Federal Reserve reported “modest to moderate” growth last month in eight of its 12 districts amid harsh winter weather. U.S. businesses increased jobs by 139,000 last month, compared with gain of 127,000 in January that was revised down, according to the ADP Research Institute. The Labor Department is due to release February’s nonfarm payrolls data on March 7.

The Fed “made the point that some of the weakness in the employment situation is due to the harsh winter weather,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 22 primary dealers that trade with the Fed. By the policy makers’ next meeting Jan. 28-29, “they will see Friday’s employment report, so they’ll have a better idea of the employment situation.”

The 10-year note yield was little changed at 2.70 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader prices. The yield traded in a 3.95 basis-point range, the narrowest since Feb. 10. The price of the 2.75 percent note due February 2024 was 100 15/32.

The benchmark yield jumped 10 basis points, or 0.1 percentage point, yesterday -- the biggest on a closing basis since Nov. 8 -- as easing tensions in the Ukraine reduced demand for haven assets. It touched 2.59 percent on March 3, the lowest since Feb. 4.

Debt Outflows

Investor flows of $6.068 billion out of exchange-traded funds of U.S. fixed income securities on March 4, compared with the 20-day average of $953.9 million inflows and the five-day mean of $5.765 billion, suggesting a diminishing appetite for debt, according to ETF data compiled by Bloomberg.

Investors have favored ETFs investing in U.S. stocks, which took in $1.435 billion on March. 4, below above the 20-day average of $2.448 billion, Bloomberg data show. U.S. fixed-income ETFs have taken in $11.3 billion this year, compared with $11.3 billion in outflows from domestic equity funds, Bloomberg data show.

Treasuries remain attractive versus their Group of Seven counterparts. The extra yield 10-year Treasuries offer over their G-7 peers was 54 basis points, at almost the highest level since April 2010. The average over the period is negative 13 basis points.

Stormy Weather

The Bloomberg U.S. Treasury Bond Index has gained 1.8 percent since the end of 2013 as investors attempt to ascertain whether the recent weakness in economic data is because of unusually harsh weather or a more fundamental slowdown that could prompt the Fed to slow its tapering of monetary stimulus. German bonds have gained 2.4 percent.

While most of the Fed’s districts “reported improved levels of activity,” the New York and Philadelphia districts reported declines that were “mostly attributed to the unusually severe weather,” the Fed said today in its Beige Book business survey.

Companies were forecast to increase jobs by 155,000 last month, according to the median projection of economists surveyed by Bloomberg before the ADP report today. Estimates ranged from gains of 100,000 to 180,000 after a previously reported increase of 175,000 in January.

‘Little Nervous’

The Institute for Supply Management’s non-manufacturing index declined last month more than predicted, falling to 51.6 in February from 54 the previous month, versus a forecast of 53.5 by 79 economists in a Bloomberg survey.

“The combination of the weather and the weak numbers we have seen has taken some of the optimism out of the market, and that is keeping us near relatively low yields,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The market is a little nervous and relatively constrained until we get some direction, and Friday’s data will be key to that.”

Employment grew by 150,000 last month, up from 113,000 in January, Labor Department figures will show this week, according to the median forecast of 85 economists in a Bloomberg survey. The December and January numbers were less than analysts predicted in surveys.

‘Geopolitical Situation’

Fed Chair Janet Yellen reiterated on Feb. 27 that the central bank is likely to keep curtailing its stimulus. The Fed said on Dec. 18 it would trim its monthly bond purchases to $75 billion from $85 billion, before cutting by another $10 billion in January. The purchases are designed to hold down long-term borrowing costs and spur economic growth.

The Fed bought $2.54 billion of Treasuries today due from December 2019 to February 2021 under its quantitative-easing stimulus strategy to hold down borrowing costs and fuel economic growth.

“The hurdle to get them to taper the taper is extraordinarily high,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, one of 22 primary dealers that trade with the U.S. central bank. “The geopolitical situation has to take a drastic turn for the worst to get them to change their current” policy.

German bunds and U.K. gilts fell as U.S. and Russia diplomats met in an attempt to reduce tensions a day after Russian President Vladimir Putin said he saw no immediate need to invade Ukraine, while the U.S. threatened sanctions. Secretary of State John Kerry met Russian Foreign Minister Sergei Lavrov in Paris.

“We’re expecting this could be the worst of the tensions” with Russia, said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York.

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