Treasury 5-Year Rise After Smallest Jobs Gain This Year

Treasury five-year notes rose after a report showing the smallest jobs growth this year in August boosted speculation that the Federal Reserve will maintain monetary accommodation into the second half of next year.

Yields on five-year securities dropped the most in more than a month after the Labor Department said the U.S. added 142,000 jobs in August. Traders see a 41 percent chance Fed Chair Janet Yellen will raise the target rate for overnight loans between banks to at least 0.5 percent by June, compared with 47 percent before the report, federal funds futures show.

“It’s not a terrible number, but it’s definitely disappointing,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 22 primary dealers that trade with the Fed. “It still suggests to us the Fed’s going to be cautious. The folks who think the Fed was going to hike early will have to re-evaluate that view.”

The yield on five-year notes fell two basis points, or 0.02 percentage point, to 1.69 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent note maturing in August 2019 rose 3/32, or 94 cents per $1,000 face value, to 99 22/32. The yield dropped as much as nine basis points, the most since Aug. 1, when the Labor Department reported the U.S. added fewer-than-forecast jobs in July.

The benchmark 10-year note yield rose less than one basis point to 2.46 percent after dropping as much as six basis points. The yield earlier reached 2.47 percent, the highest since Aug. 7, and added 12 basis points on the week. The yield on the 30-year bond rose two basis points to 3.23 percent amid bets the European Central Bank’s efforts to boost the euro economy will stem the risk of deflation.

Net Longs

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $414.5 billion, from $454 billion yesterday that was the highest since Aug. 1. This year’s average is $324 billion. Daily volume reached $504 billion on Aug. 1, the highest level in three months.

Hedge-fund managers and other large speculators increased futures bets on Treasury five-year notes in the week ending Sept. 2 to a 85,202 net-long position, the biggest since July 2013, according to U.S. Commodity Futures Trading Commission data. The figure compares with net longs, or bets prices will rise, of 70,173 contracts a week earlier, data from the Washington-based CFTC show.

“I’d be selling strength in the five-year part of the curve,” Jersey said. “That’s where Fed expectations are going to continue to be mostly priced.”

Relative Value

The gap between yields on five- and 30-year U.S. Treasury securities steepened to 153 basis points, a two-week high, as investors bet the Fed won’t accelerate any rise in interest rates, pushing short-term yields down faster than longer-term debt.

Shorter-term debt is more sensitive to investor expectations of monetary policy than longer-term peers that react to inflation levels.

The gap narrowed to 1.42 percentage points on Aug. 28, the least since 2009. The curve plots the difference between yields on various maturities.

The demand for Treasuries was boosted by the allure of higher-yielding U.S. assets. The U.S. benchmark 10-year note yielded the most versus its Group of Seven counterparts in seven years as European yields fell. The security yielded 86 basis points more than its Group of Seven counterparts, the widest since June 2007.

The difference between the U.S. 10-year note yield and the comparable German bund reached 153 basis points, the widest since June 1999.

‘Very Attractive’

“Given where European rates are, the U.S. looks very attractive,” Richard Schlanger, who helps invest $30 billion in fixed-income securities as vice president at Pioneer Investments in Boston.

The range in 10-year yield through the end of the year is likely to be 2.375 percent to 2.75 percent, said Schlanger, who has reduced purchases of corporates in favor of securitized debt.

The 10-year yield will climb to 2.89 percent by year-end, according to a Bloomberg survey of economists with the most recent forecasts given the heaviest weightings.

Treasuries erased earlier losses as the advance in payrolls was weaker than the lowest estimate in a Bloomberg survey and followed a revised 212,000 gain in July, figures from the Labor Department showed today in Washington. The median Bloomberg survey estimate was for a 230,000 increase.

Cautious, Patient

The unemployment rate fell to 6.1 percent from 6.2 percent in July, reflecting a drop in joblessness among teenagers.

The so-called participation rate, which indicates the share of working-age people in the labor force, decreased to 62.8 percent from 62.9 percent a month before.

“Today’s data obviously says Chair Yellen is right to be cautious and to be patient,” Paul McCulley, chief economist at Pacific Investment Management Co., said on “Bloomberg Surveillance” with Tom Keene and Mike McKee. “It reinforces the notion that Wall Street should sit down and take a break from the standpoint of screaming that the Fed is behind the curve. The Fed is not behind the curve.”

Some participants at the Federal Open Market Committee’s July meeting “were increasingly uncomfortable” with the FOMC’s forward guidance on keeping its benchmark rate low for a “considerable time,” according to the minutes published Aug. 20. “Many” participants said they might have to raise borrowing costs sooner than they had anticipated.

Policy makers reduced the Fed’s monthly pace of debt purchases by $10 billion to $25 billion, and are on a pace to end them in October. The central bank left its target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since 2008.

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