U.S. Yield Curve Steepens First Time in Month as Jobs DisappointCordell Eddings and Susanne Walker
The yield gap between U.S. two- and 30-year debt widened for the first time in a month after payrolls expanded less than forecast, damping speculation the Federal Reserve will speed up interest-rate increases projected for next year.
The two-year yield, more sensitive to investor expectations of monetary policy than that on the longer-term debt in the so-called yield curve, fell for the first week since July 11. The U.S. reported wages were unchanged in July as the economy added 209,000 jobs. Futures trading showed a 44 percent chance Fed Chair Janet Yellen will raise interest rates by June, versus 54 percent a month ago. A private report next week is forecast to show growth in the U.S. services sector.
“The front end is pricing in a Fed that is still steady as she goes, with no wage gains to get it to change its mind,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “People are dying to be bearish on bonds, but the Fed remains dovish, and the jobs number, while not horrible, was just not as strong as people expected, and that argues for a steeper curve.”
The yield curve steepened to 280 basis points, or 2.80 percentage points, this week in New York. It flattened significantly this year, reaching a 15-month low of 268 basis points on July 29, as Fed discussions of boosting rates next year hurt the appeal of shorter-term debt while uneven economic growth supported demand for longer-term securities.
U.S. two-year note yields fell two basis points to 0.47 percent, according to Bloomberg Bond Trader prices. The 30-year bond yield rose four basis points to 3.28 percent in its first weekly increase in a month.
The yield on the 10-year note, a benchmark for global borrowing costs, advanced three basis points to 2.49 percent. It touched 2.61 percent on July 31 , the highest since July 8.
CRT Capital is bullish on Treasuries, Ader said.
U.S. government securities dropped on July 30 after a report showed gross domestic product expanded 4 percent in the second quarter, more than forecast, signaling the world’s largest economy is building steam.
The Fed, ending a policy meeting the same day, trimmed the pace of monthly bond purchases by $10 billion for a sixth consecutive meeting. It lowered bond-buying to $25 billion, on pace to end the stimulus program this year.
Policy makers left the target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since 2008, saying slack persists in the labor market.
The increase in U.S. jobs, marking the sixth straight month employers have added more than 200,000 workers, compared with a Bloomberg survey’s forecast for 230,000. It followed a 298,000-position gain in June that was stronger than previously reported, Labor Department figures showed yesterday. The unemployment rate climbed to 6.2 percent from 6.1 percent as more people entered the labor force.
“The Fed has a little more wood to chop,” Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston, said yesterday. “They’re succeeding in their goals, but they still have some work to do, so they’re going to remain accommodative.” Pioneer holds less in Treasuries than benchmark indexes do and is adding corporate debt, he said.
Average hourly earnings were unchanged at $24.45 in July, according to Labor Department figures. The Fed’s preferred gauge of inflation, a measure tied to consumer spending, fell short of its previous level, data showed. It rose 1.6 percent in June from a year earlier, after increasing a revised 1.7 percent in May. Policy makers’ inflation target is 2 percent.
“It’s the lack of inflation that’s putting a bid into Treasuries,” Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, said yesterday. “The average hourly earnings were unchanged, showing there’s still a lot of slack in the labor market.”
Pollack is buying municipal bonds for accounts with big tax concerns and corporate securities for accounts with income needs. He forecasts the 10-year Treasury yield will rise to 2.85 percent by the end of the year.
The yield will climb to 3.11 percent by year-end, according to a Bloomberg survey of economists and analysts with the most recent forecasts given the heaviest weightings.
Pacific Investment Management Co.’s Bill Gross said 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 after the jobs report during an radio interview on “Bloomberg Surveillance” with Tom Keene.
The Institute for Supply Management’s non-manufacturing index, which covers an array of industries that make up almost 90 percent of the U.S. economy, rose in July to the highest since August 2013, economists surveyed by Bloomberg forecast before the report due Aug. 5. The gauge increased to 56.5, from 56 the previous month, the economists estimated. Readings greater than 50 signal expansion.
The U.S. auctioned $93 billion in notes this week. It sold $29 billion of two-year debt on July 28 at a yield of 0.544 percent, the highest in more than three years; $35 billion of five-year securities on July 29 at a yield of 1.720 percent; and $29 billion of seven-years at a yield of 2.250 percent on July 30. It also sold $15 billion of two-year floating-rate notes on July 30 at a high discount margin of 0.070 percent.
Investors bid 2.87 times the amount of the nominal securities sold, up from 2.8 in June.
Buyers of U.S. debt have offered 3.04 times the $1.307 trillion of notes and bonds auctioned by the U.S. this year, compared with 2.87 times the $2.14 trillion sold last year and the record 3.15 times the $2.153 trillion sold in 2012, Treasury data compiled by Bloomberg show