Treasury Drop Lifts Yield to 15-Year High Versus Germany

A Treasuries decline this week pushed yields to a 15-year high versus German bunds before a U.S. government report today that economists said will show the nation added more than 200,000 jobs for a fifth month.

U.S. securities are posting a loss for the past month after a report from the ADP Research Institute yesterday showed company hiring increased in June by the most since November 2012. The data added to signs the economy is strong enough to prompt the Federal Reserve to raise interest rates next year. The European Central Bank kept interest rates unchanged at record lows.

“It’s hard to see the 10-year spread narrowing from here because we have the ECB being very committed to low rates and the Fed guiding for rate hikes next year,” said Peter Possing Andersen, an analyst at Danske Bank A/S in Copenhagen. “Yesterday we got a pre-warning from the ADP data so expectations are somewhat higher now for payrolls. We need a print at about 250,000 to ignite a meaningful reaction in rates higher.”

The benchmark 10-year yield was little changed at 2.63 percent at 8:03 a.m. New York time, according to Bloomberg Bond Trader data. It earlier reached 2.64 percent, the highest level since June 20. The price of the 2.5 percent note due in May 2024 was 98 28/32.

Ten-year Treasuries yielded 132 basis points more than similar-maturity German debt, after the spread reached 134 basis points yesterday, the widest since June 1999, according to closing-price data. A basis point is 0.01 percentage point.

Early Close

The Bloomberg U.S. Treasury Bond Index dropped 0.4 percent in the past month to yesterday. The Bloomberg Global Developed Sovereign Bond Index has gained 0.6 percent.

Treasuries are scheduled to close at 2 p.m. New York time and stay shut worldwide tomorrow in observance of the U.S. Fourth of July holiday, according to the Securities Industry and Financial Markets Association.

U.S. employers added 215,000 jobs in June, compared with 217,000 in May, based on the median estimate in a Bloomberg News survey of economists before today’s Labor Department report. Companies hired 281,000 workers last month, after adding 179,000 in May, ADP Research Institute said yesterday. Analysts forecast an increase of 205,000 jobs.

Separate data today will show the trade deficit shrank, initial claims for unemployment insurance were little changed and growth in service industries was unchanged, the surveys show.

Payrolls Impact

A better-than-expected payrolls report in the 270,000 to 320,000 range should push 10-year yields six to 11 basis points higher today, according to analysts at Societe Generale SA, including Vincent Chaigneau, Paris-based global head of rates and foreign-exchange strategy.

The Treasury Department is scheduled to announce the sizes of three sales of coupon-bearing securities it plans for three days starting July 8.

It will auction $27 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds, according to Stone & McCarthy Research Associates, an economic advisory company in Princeton, New Jersey.

Mizuho Asset Management Co. is betting Treasury gains will push yields down to 2.25 percent by year-end, said Yusuke Ito, a bond investor for the Tokyo-based company that oversees the equivalent of $39 billion.

Labor Report

“Long-term growth prospects are not so rosy,” Ito said. “Inflationary pressure is quite weak.”

While the economy added jobs in May, other data in the employment report for that month revealed the uneven nature of the recovery.

The participation rate, which shows the share of working-age people in the labor force, held at 62.8 percent, matching the lowest level since March 1978. Average hourly earnings rose 2.1 percent from a year earlier, versus as much as 3.9 percent in 2007 before the last recession.

“You’re likely to see a bit of defensiveness to the Treasury market,” said Martin Whetton, an interest-rate strategist in Sydney at Nomura Holdings Inc., one of the 22 primary dealers that trade directly with the Fed. “The tendency for U.S. data has been a little bit on the stronger side.”

Traders see about a 56 percent chance the Fed will increase its benchmark rate to at least 0.5 percent by July 2015, up from 43 percent at the end of May, based on federal fund futures contracts. Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.

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