Treasury Bond Rise Trims Yield Curve to 6-Year Low on InflationSusanne Walker
Treasury bonds rallied, pushing the difference between yields on the securities and five-year notes to the narrowest in almost six years, after a report showed unit labor costs declined.
The gap, known as the yield curve, narrowed to 1.38 percentage points as a report showed third-quarter unit labor costs fell 1 percent. “Overall price and wage inflation remained subdued,” the Federal Reserve said before the government’s monthly employment report on Dec. 5. Brent crude traded at about $70 a barrel, down 36 percent this year, damping the outlook for inflation.
“We’re really not seeing a pick-up in inflation,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “It’s going to be very difficult for Treasury rates to move substantially higher, particularly out the curve.”
The benchmark 10-year note yield fell one basis point, or 0.01 percentage point, to 2.28 percent as of 4:59 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.25 percent note maturing in November 2024 rose 3/32, or 94 cents per $1,000 face amount, to 99 23/32.
Thirty-year bonds yields declined three basis points to 2.99 percent.
The 10-year break-even rate, a measure of inflation expectations, touched the lowest level in three years. The difference between yields on 10-year notes and similar-maturity TIPS dropped to as low as 1.78 percentage points.
The yield curve also narrowed as shorter-term yields rose as a report showed service providers expanded at the second-fastest pace in nine years.
The Institute for Supply Management’s non-manufacturing index rose to 59.3, the second-highest level since August 2005, from 57.1 in October, the Tempe, Arizona-based group said today. The figure exceeded the highest projection in a Bloomberg survey of 78 economists.
Five-year note yields gained one basis point to 1.6 percent.
Fed Bank of Philadelphia President Charles Plosser said a drop in the unemployment rate and moderate economic growth call for returning monetary policy to normal from an emergency stance with almost-zero interest rates.
“Keeping the funds rate target near zero when inflation is close to our goal and the economy is near full employment is both unprecedented and risky,” Plosser said in a speech in Charlotte, North Carolina. The improving economy “should reflect that normalization.”
While the U.S. is adding jobs, slow income growth is keeping inflation in check. This week’s employment report will also show U.S. average hourly earnings increased 2.1 percent in November from a year earlier, based on the Bloomberg surveys. The figure has averaged 2 percent this year, unable to bounce back from the recession that began in December 2007 and ended in June 2009. It was as high as 3.6 percent in 2008.
A report today showed unit labor costs fell by more than the 0.2 percent forecast in a Bloomberg News survey.
“General wage pressures are quite low and not building,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 22 primary dealers that trade with the Fed. “Everyone is just cautious. There aren’t many signs of” inflation.
Companies in the U.S. added 208,000 workers last month, figures from the Roseland, New Jersey-based ADP Research Institute showed today. The median forecast of 47 economists surveyed by Bloomberg called for an advance of 222,000. Payrolls have climbed by at least 200,000 in seven of the last eight months.
The U.S. added 230,000 jobs last month, up from 214,000 in October, according to a Bloomberg News survey of economists. The unemployment rate remained at 5.8 percent, a six-year low, according to a separate survey.
Although “employment gains were widespread across districts” as the world’s largest economy continued to expand amid advances in consumer spending and lower gasoline prices, inflation is still low, the Fed said in its Beige Book business survey, based on reports gathered on or before Nov. 24.
U.S. gross domestic product is projected to grow at a rate of 3 percent next year, compared with 1.2 percent for the euro-area, according to forecasts in a Bloomberg News survey.
“People believe the U.S. may lose a couple of percentage points off GDP because of the global slowdown,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York.
Treasuries due in 10-years or more have returned 20 percent this year, while those due in five-years or less have returned 1.5 percent, according to Bloomberg U.S. Treasury Bond index.