Bloomberg News

Treasuries Fail to Recoup Loss as Economists Predict Job Gains

July 08, 2011

July 8 (Bloomberg) -- Treasuries failed to recover from a loss as economists said a government report today will show employment growth quickened in June and is poised to improve in the second half of the year.

Demand for higher-yielding assets buoyed company bonds and stocks over Treasuries as Deutsche Bank AG raised its forecast for today’s report, after ADP Employer Services said U.S. employers hired more workers than economists forecast. An index of U.S. corporate bonds yielded 2.45 percentage points more than Treasuries, the least in a month.

“We reduced longer-term bonds a little,” said Hiromasa Nakamura, who helps oversee the equivalent of $36.9 billion as a senior investor in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Risk aversion is receding.” Nakamura said Mizuho last week sold some of its longest maturities, those most vulnerable to rising yields.

U.S. 10-year rates were little changed at 3.15 percent as of 6:39 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent note due in May 2021 traded at 99 26/32. The rate climbed three basis points yesterday.

Japan’s 10-year yields were at 1.175 percent after rising to 1.18 percent yesterday, the highest in two months.

The extra yield investors demand to own Japanese 30-year debt instead of two-year notes widened to 1.94 percentage points yesterday, the most since May 5, after Prime Minister Naoto Kan said this week a “considerable” amount of bonds will be needed to pay for rebuilding from the March earthquake and tsunami.

Payrolls Increase

U.S. employers added 105,000 jobs in June after an increase of 54,000 in May, according to the median forecast of economists surveyed by Bloomberg before the Labor Department report. The unemployment rate held at 9.1 percent, another survey projected.

The MSCI Asia Pacific Index of shares rose 0.6 percent, heading for a third weekly gain.

Companies surveyed hired 157,000 workers in June, after adding 36,000 the prior month, the ADP National Employment Report showed yesterday. Deutsche Bank economists led by Joseph A. LaVorgna in New York raised their forecast for today’s jobs gain to 175,000 from 100,000. Unemployment will drop to 9 percent, Deutsche Bank, one of the 20 primary dealers authorized to trade directly with the Federal Reserve, said in a report yesterday.

The 10-year yield will rise to 3.5 percent by year-end, Deutsche Bank forecast.

Stocks Versus Bonds

The difference between yields on five-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.15 percentage points, the most in seven weeks.

Treasuries have handed investors a loss of 0.46 percent in the past month, based on Bank of America Merrill Lynch data. Thirty-year securities, those most vulnerable to inflation, dropped 1.35 percent. U.S. corporate bonds fell 0.33 percent, the indexes show.

The MSCI All Country World Index of stocks had a total return of 3.89 percent since June 8, according to data compiled by Bloomberg.

Investors should favor stocks over bonds, said Sungjin Park, Seoul-based chief investment officer for the fixed-income division at Samsung Asset Management Co., South Korea’s largest private debt investor. The Fed will hold interest rates at current levels, limiting movement in Treasuries, he said.

“That will keep volatility in the fixed-income market low but it will help the equity market,” said Park, who oversees the equivalent of $58.5 billion in debt.

MOVE Index

The Merrill Option Volatility Estimate, which gauges price swings in the Treasury market, fell to 90.40 from 110.40 at the end of last year.

The Fed bank has held its target for overnight bank lending in a range of zero to 0.25 percent since 2008. The central bank completed a $600 billion bond-purchase program in June.

Investors should bet the spread between five- and 30-year yields will widen as President Barack Obama tries to get Congress to lift the federal borrowing limit, Barclays Capital Inc., another primary dealer, said in a report today. The Treasury has said it has until Aug. 2 before its ability to pay the debt expires.

If there is no agreement by then, government spending will have to be cut, Ajay Rajadhyaksha, head of U.S. fixed income and securitized products strategy, wrote in the report. Investors will reduce expectations for the Fed to raise rates, supporting notes, while uncertainty over the fiscal situation will boost longer-maturity yields, he wrote.

Longer bonds probably won’t gain much until the longer-term issue of funding Medicare and Social Security is resolved, the report said.

Thirty-year bonds yielded 2.63 percentage points more than five-year notes, compared with the five-year average of 1.50 percentage points.

--With assistance from Susanne Walker in New York. Editor: Jonathan Annells

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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