U.S. 5-Year Yield Rises Most in 3-Months on Jobless-Claims Trend

Treasuries fell, with five-year note yields rising the most in almost three months, after a report showed the fewest initial unemployment claims in 14 years, stoking speculation the Federal Reserve will determine economic growth is on track to allow the end of monthly bond-buying.

Benchmark 10-year note yields reached the highest level in a week as report showed euro-area manufacturing strengthened this month, easing concern that slowing global growth may hinder the U.S. economy. The Fed meets next week. The Treasury’s auction of $$7 billion of 30-year Treasury Inflation Protected Securities drew a higher-than-forecast yield.

“A falling probability of very accommodative policies being extended is weighing on the five-year note,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of 22 primary dealers that trade with the Fed. “The selloff began overnight with the stronger euro-zone data.”

The five-year note yield increased seven basis points, or 0.07 percentage point, to 1.49 percent at 5:01 p.m. New York time, Bloomberg Bond Trader data show. The 1.75 percent note due in September 2019 dropped 10/32, or $3.13 per $1,000 face amount, to 101 7/32. The yield rose as much as nine basis points, the most since July 30.

Benchmark U.S. 10-year yields rose five basis points to 2.27 percent. Treasuries gained 1.96 percent in the past month, beating their German and Japanese counterparts, according to Bloomberg World Bond Indexes.

Dealer Positions

Wall Street bond dealers increased their holdings of coupon-bearing Treasuries by $7.4 billion in the week ended Oct. 15, according to Federal Reserve data. Holdings of Treasury bills increased $20.5 billion.

The TIPS securities yielded of 0.985 percent, versus the average 0.975 percent forecast of seven of the Fed’s primary dealers in a Bloomberg News survey. The sale drew a bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, of 2.29, versus an average of 2.68 at the past 10 offerings.

The difference between yields on 30-year TIPS and comparable non-indexed Treasuries narrowed to 1.99 percentage points this month, the least since October 2011, from 2.46 percentage points in January, spurred by data showing scant price pressure in the U.S. economy.

The Treasury announced plans to sell $29 billion of two-year notes on Oct. 28, $35 billion of five-year debt on Oct. 29 and $29 billion of seven-year securities on Oct. 30. The U.S. will also sell $15 billion of two-year floating-rate notes on Oct. 29.

European Conditions

The euro area purchasing managers’ index for the manufacturing industry rose to 50.7 in October from 50.3 a month earlier, London-based Markit Economics said. Analysts surveyed by Bloomberg News predicted a drop to 49.9.

The U.S. four-week average of jobless claims, a less-volatile measure than the weekly figure, dropped to 281,000, the lowest since May 2000, from 284,000 the week before, a Labor Department report showed. The reading for the week ended Oct. 18 climbed by 17,000 to 283,000, in line with the median forecast of 52 economists surveyed by Bloomberg.

“It’s supportive of another strong employment report for the month of October,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It is part of what is driving the equity market higher and is keeping pressure on the Treasury market.”

Lyngen said the best places in the Treasury market to sell “are the five-and 10-year” securities.

Data yesterday showed consumer prices unexpectedly rose last month, reducing concern the economy was in danger of deflation.

Inflation Watch

The consumer price index climbed 0.1 percent after decreasing 0.2 percent in August, a Labor Department report showed yesterday. During the past year, costs increased 1.7 percent, the same as in the 12 months through August. The forecast was for a 1.6 percent gain. That’s below the Fed’s goal.

“The worst of the deflationary fears are being put to rest,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC. “Yields should be higher than they are.’”

The Fed is scheduled to meet Oct. 28-29, after indicating in September that it planned to end its bond purchases, known as quantitative easing, this month.

The price of the 30-year futures contracts expiring in June jumped 7.3 percent yesterday, the first day they traded. What sets them apart is they’re the first futures where the U.S. government’s decision to stop issuing 30-year debt between 2001 and 2006 must be accounted for when valuing the derivatives.

Yesterday’s price surge, in which 1,639 contracts with a notional value of $164 million changed hands, looks like an error caused by someone failing to incorporate that into his or her trading strategy, according to Craig Pirrong, a finance professor at the University of Houston.

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