Bloomberg News

Two-Year Treasury Yield Near Week High Before Labor Market Data

July 08, 2011

July 8 (Bloomberg) -- Treasury two-year note yields reached the highest in a week as economists said a government report today will show employment growth quickened in June.

Treasuries pared an earlier decline amid concern the euro- region sovereign-debt crisis may be worsening. 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. Companies hired 157,000 workers in June, after adding 36,000 the prior month, the ADP National Employment Report showed yesterday.

“The market’s waiting for the non-farm payrolls data,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “There’s an expectation that the number could be better than consensus after yesterday’s ADP numbers. The market is vulnerable to upside data surprises and that could push yields higher.”

U.S. two-year yields were little changed at 0.47 percent as of 6:51 a.m. in New York, according to Bloomberg Bond Trader prices, after reaching 0.48 percent earlier, the most since July 1. The 0.375 percent security due in June 2013 traded at 99 26/32. The rate climbed five basis points yesterday. The five- year note yield was also little changed at 1.73 percent after rising seven basis points yesterday.

Euro-Region Debt

Italian bonds slid for a fifth straight day, pushing yields to a nine-year high, as contagion from Greece’s fiscal crisis intensified in the region’s biggest government-debt market. Spanish, Irish and Greek bonds also fell.

“Peripheral euro-government bonds have weakened and that’s given support to the core markets, such as Treasuries and bunds,” Wand said.

Treasury 10-year note futures rose, with the contract expiring in September gaining 2/32 to 122 17/32.

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.

The benchmark Stoxx Europe 600 Index rose for the ninth day in 10, gaining as much as 0.4 percent, while futures on the Standard & Poor’s 500 Index fell 0.1 percent.

Raised Forecast

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

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 since May 19, before paring to 2.11 percentage points.

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 3.9 percent since June 8, according to data compiled by Bloomberg.

Treasuries Volatility

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.

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 has held its target for overnight bank lending in a range of zero to 0.25 percent since December 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.

Debt Limit

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 Paul Dobson and Emma Charlton in London. Editors: Matthew Brown, Keith Campbell

To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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