Treasuries Climb After U.S. Jobs Growth Trails Forecast

Treasuries climbed, led by five-year notes, after data showing the U.S. added fewer jobs than forecast in July damped bets the Federal Reserve will accelerate a reduction of monetary stimulus forecast for 2015.

The five-year yield, more sensitive to Fed policy than longer-term debt, slid the most since April after the Labor Department reported wages were unchanged as payrolls grew by 209,000 jobs. Traders saw a 44 percent chance Fed Chair Janet Yellen will raise the benchmark interest-rate target to at least 0.5 percent by June, compared with 54 percent a month ago, Fed funds futures showed.

“It’s not a good enough number to force the Fed to accelerate their timing with regard to a rate hike,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “The average hourly earnings were unchanged, showing there’s still a lot of slack in the labor market.”

U.S. five-year note yields dropped nine basis points, or 0.09 percentage point, to 1.66 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They slid as much as 10 basis points, the biggest intraday drop since April 4. The yields were little changed on the week. The price of the 1.625 percent security due in July 2019 added 14/32, or $4.38 per $1,000 face amount, to 99 26/32.

The 10-year note yield, a benchmark for global borrowing costs, decreased seven basis points to 2.49 percent, paring a weekly increase to three basis points. The yield reached 2.61 percent yesterday, the highest level since July 8. Thirty-year bond yields declined four basis points to 3.28 percent.

Net Shorts

Hedge-fund managers and other large speculators reduced bets on a decline in U.S. 10-year notes in the week ending July 29 to the least since August 2013, according to U.S. Commodity Futures Trading Commission data. Speculative net-short positions, or bets prices will fall, dropped to 5,806 contracts, from 38,159 the week before.

Speculators reversed bets in futures on Treasury two-year notes to a 91,787 net-long position, the biggest since April 2013, compared with a net short position of 18,777 contracts the week before, CFTC data show.

The amount of Treasuries traded today through Icap Plc, the largest inter-dealer broker of U.S. government debt, rose to $503 billion, the highest level since May 2. It was $488 billion yesterday. Daily volume touched a 2014 high of $606 billion on May 2 and a low of $146 billion on April 21. The daily average volume this year is $328 billion.

Yield Curve

The difference between yields on five-year notes and 30-year bonds, known as the yield curve, widened to 161.6 basis points as rates dropped on shorter-term securities. The spread narrowed on July 30 to 149 basis points, the least since January 2009.

Treasuries extended gains as trading was suspended in the Portuguese lender Banco Espirito Santo SA and Argentina’s default hurt risk appetite.

Portugal’s securities regulator suspended Banco Espirito Santo shares pending information about the lender, according to a statement on the regulator’s website. The stock was down 40 percent before the action. Banco Espirito Santo was ordered yesterday to raise capital following a 3.6 billion-euro ($4.8 billion) first-half net loss after it had to set aside money to cover souring loans to other Espirito Santo Group members.

“Bonds shot up” on Banco Espirito, said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “We continue to see buyers on dips and people willing to invest at these levels.”

Argentina’s failure to pay interest on its bonds is a credit event that will trigger settlement of $1 billion of credit-default swaps, according to the International Swaps & Derivatives Association. The nation is the first to trigger default swaps since Greece restructured its debt in 2012.

Gross’s Outlook

Pacific Investment Management Co.’s Bill Gross said after the payrolls report that U.S. policy makers will remain accommodative with the lack of wage growth. The Fed and other central banks “have to stay low for a long, long time,” Gross, manager of the world’s biggest bond fund, said during an radio interview on “Bloomberg Surveillance” with Tom Keene.

The gain in jobs compared with a Bloomberg survey’s median forecast of 230,000. It followed a 298,000 increase in June that was stronger than previously reported, Labor Department figures showed today in Washington. The unemployment rate rose to 6.2 percent from 6.1 percent as more people entered the labor force.

Average hourly earnings were unchanged at $24.45 in July. The Fed’s preferred gauge of inflation, a measure tied to consumer spending, fell short of last month’s level, data showed. It rose 1.6 percent from a year earlier, after advancing a revised 1.7 percent in May. The central bank’s target is 2 percent.

Inflation Lack

“It’s the lack of inflation that’s putting a bid into Treasuries,” said Pollack of Deutsche Bank. He’s buying municipal bonds for accounts with big tax concerns and corporate securities for accounts with income needs. He forecast the Treasury 10-year yield will rise to 2.85 percent by the end of the year.

A Bloomberg survey of economists with the most recent forecasts given the heaviest weightings estimates the 10-year yield will climb to 3.11 percent by year-end.

Treasuries dropped on July 30 after a report showed the U.S. economy grew faster than forecast in the second quarter and the Fed trimmed the monthly pace of bond purchases for the sixth consecutive policy meeting, while saying the threat of deflation is easing. Gross domestic product increased 4 percent, more than forecast.

Policy makers reduced the Fed’s monthly pace of debt purchases by $10 billion to $25 billion, on pace to end the stimulus program this year. They left the target for overnight lending between banks in a range of zero to 0.25 percent, where it has been since 2008.

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