Treasuries Advance on Weak Jobs Growth, Trade Deficit

Treasuries advanced for the first time in five days as a private report showed U.S. companies added fewer jobs than forecast in May and the trade deficit in April ballooned to the widest in two years.

Benchmark 10-year yields declined from a three-week high after ADP Research Institute said U.S. employers added 179,000 workers to their payrolls in May, below the 210,000 forecast. The trade gap grew by 6.9 percent, Commerce Department figures showed. U.S. debt was supported before a European Central Bank policy decision tomorrow amid speculation policy makers are considering a package of stimulus measures.

“We saw a pretty big bounce on the back of that slightly weaker number,” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, said referring to ADP levels. “Directionally, it’s another negative signal. A decent-size easing from the ECB could trigger good overseas demand for Treasuries.”

The U.S. 10-year yield fell one basis point, or 0.01 percentage point, to 2.59 percent at 9:53 a.m. New York time after climbing to 2.60 percent, the highest level since May 14. The 2.5 percent note due May 2024 rose 3/32, or 94 cents per $1,000 face amount, to 99 7/32.

G-7 Peers

The extra yield 10-year notes offer over their Group of Seven peers narrowed two basis points to 61 basis points today. It expanded to 63 basis points yesterday, the widest since May 12.

Even after the four-day decline, the Bloomberg U.S. Treasury Bond Index has gained 2.8 percent for 2014 through yesterday, headed for its best year since 2011.

The Bank of America Merrill Lynch MOVE Index, which measures price swings based on one-month Treasury options, climbed to 60.9 basis points yesterday, the highest level since April 3. The average over the past decade is 92.2.

The median forecast of 45 economists surveyed by Bloomberg had estimates for ADP May jobs growth ranging from gains of 120,000 to 275,000. The increase was down from a revised 215,000 boost in April.

Nonfarm payrolls data on June 6 may show the economy added more than 200,000 jobs for a fourth month, according to a Bloomberg survey.

‘Lower Yields’

“There’s a lot of position-squaring going on before Friday’s employment number,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “We can stay in this 2.62 percent-to-2.48 percent range. Until we break 2.62 percent, we’ll stay closer to lower yields.”

The Federal Reserve is scheduled to issue its Beige Book report on the economy at 2 p.m.

The trade gap rose to $47.2 billion from the prior month’s $44.2 billion, larger than previously estimated, Commerce Department figures showed. The reading exceeded all estimates in a Bloomberg survey of 70 economists and was the biggest since April 2012.

“The one thing the market will focus more on is the trade balance -- the deterioration suggests a slightly weaker profile for the second quarter,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 22 primary dealers that trade with the Fed. “We will have to trim Q2 gross domestic product to some extent.”

Year-End Forecasts

GDP is forecast to grow 3.5 percent in the second quarter, according to a Bloomberg survey of economists.

Porcelli forecasts 10-year yields will rise to 3.3 percent by year-end. The median estimate in a Bloomberg survey of 73 economists and strategists is 3.15 percent.

Forty-four of 50 economists surveyed by Bloomberg News predict the ECB will become the first major central bank to take interest rates below zero by cutting its deposit rate. All except two of 60 respondents in a separate Bloomberg survey said the ECB will also lower its main refinancing rate from a record-low 0.25 percent.

“One can’t help but feel that markets are in thrall of ECB day tomorrow,” said Marc Ostwald, a strategist at Monument Securities Ltd. in London.

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