Treasuries Fall as Projected Jobs Strength Damps Refuge Demand

Treasuries fell for a second day before a report forecast to show strength in the U.S. labor market, damping refuge demand as the Federal Reserve considers an interest-rate increase for later this year.

Benchmark 10-year yields rose and equities gained as futures markets are pricing in a 57 percent chance of rates rising by September even as a Fed measure of inflation expectations, known as the five-year, five-year forward, dropped to the lowest level since 2001. The new-year rally in global sovereign bonds paused after driving yields to record lows as plunging oil prices lowered inflation projections.

“The market got a little bit carried away,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 22 primary dealers that trade with the Fed. “I don’t think the yields make a lot of sense. The Fed in the middle of this year will nudge rates higher.”

The benchmark 10-year yield rose five basis points, or 0.05 percentage point, to 2.02 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. The 2.25 percent note maturing in November 2024 fell 14/32, or $4.38 per $1,000 face amount, to 102 1/32.

The Standard & Poor’s 500 Index of stocks gained 1.8 percent and erased losses since the beginning of the year.

Fed ’Normalization’

Government bonds around the world began 2015 with a rally as tumbling oil prices signaled inflation will hold in check. Crude oil prices have fallen about 8 percent in January, after plunging 46 percent in 2014. Bonds in the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index had an effective yield of 1.25 percent yesterday, climbing back from the record low of 1.244 percent set the day before.

Policy makers may “begin normalization at a time when core inflation was near current levels,” according to minutes of the Fed’s December meeting released yesterday. The minutes repeated Chair Janet Yellen’s predictions that inflation would move up toward the Fed’s target as the labor market strengthens.

The Fed’s five-year, five-year forward break-even inflation rate touched 1.9 percent as of Jan. 5, the lowest level since January 2001.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities narrowed to 1.54 percentage points yesterday, down from last year’s high of 2.31 percent set in January. It’s at 1.62 percentage points today. The gauge tracks expectations for consumer prices over the life of the debt.

Inflation Measure

Most U.S. central-bank officials said they are unlikely to raise borrowing costs before late April, and a number said they were concerned inflation will remain too low, minutes showed.

U.S. debt due in 10 years and longer returned 5.7 percent over the two weeks ended yesterday, the best performer of 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

“We had seen people positioning for the worst,” said Tyler Tucci, a U.S. government-bond strategist at Royal Bank of Scotland Plc’s RBS Securities unit in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed. “For now, the immense pressure on downward yields has subsided.”

Employment Outlook

U.S. debt remained lower after a report showed jobless claims decreased by 4,000 to 294,000 in the week ended Jan. 3, the Labor Department said. The median forecast of 45 economists surveyed by Bloomberg called for a decline to 290,000.

U.S. employers added 240,000 jobs in December, according to the median estimate in a Bloomberg News survey of economists before tomorrow’s report. November jobs gains totaled 321,000, the most since January 2011.

“People’s expectations for the employment numbers is it’s going to be solid, so they may be taking profits ahead of that because the market has become somewhat erratic,” said Thomas Simons, a government-debt economist in New York at primary dealer Jefferies Group LLC.

The Treasury announced it will sell $24 billion in three-year notes on Jan. 12, reflecting the lowest amount in a sale of the maturity since May 2007 when it auctioned $14 billion. The U.S. will sell $21 billion in 10-year debt on Jan. 13 and $13 billion in 30-year bonds the next day.

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