Bloomberg News

Treasuries Drop on European Optimism, Improved U.S. Jobs Outlook

October 08, 2011

Oct. 8 (Bloomberg) -- Treasuries fell, pushing 10-year note yields up the most since July, on optimism Europe’s leaders will adopt a coordinated approach to supporting banks and as U.S. employers added more jobs last month than forecast.

Yields rose this week even as the Federal Reserve began buying longer-term debt and selling shorter maturities to keep borrowing costs low under a policy known as Operation Twist. The U.S. Treasury Department is scheduled to sell $66 billion of notes and bonds next week.

“Markets have caught the idea that something is coming or something seems to be coming out of policy talks in Europe,” said David Ader, head of government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “That has taken some of the flight-to-quality rally out of Treasuries.”

Yields on 10-year notes increased 16 basis points, or 0.16 percentage point, to 2.08 percent this week, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 dropped 1 14/32 points, or $14.38 per 1,000 face amount, to 100 14/32. Yields fell on Sept. 23 to 1.6714 percent, the lowest in Fed figures beginning in 1953.

A drop in 30-year bonds pushed yields up 10 basis points to 3.02 percent. The yields slid four days ago to 2.69 percent, the lowest level since January 2009. Two-year note yields rose five basis points to 0.29 percent.

Job Market

U.S. payrolls climbed by 103,000 workers after a revised 57,000 increase in the prior month that was more than originally estimated, the Labor Department reported yesterday. The median forecast in a Bloomberg News survey called for a rise of 60,000. The gain reflected the return to work of 45,000 telecom employees. The jobless rate held at 9.1 percent.

“The number coming in better than expected adds pressure to a Treasury market that was already vulnerable to higher rates,” said Kevin Flanagan, chief fixed-income strategist in Purchase, New York, at Morgan Stanley Smith Barney. “The data is certainly not indicative of economic strength, but it helps allay fears that recession is imminent.”

Bonds slid on speculation the European Commission is pushing for a coordinated capital injection into banks. Germany’s Chancellor Angela Merkel told reporters in Berlin this week that policy makers “shouldn’t hesitate” if it turns out financial institutions are undercapitalized.

ECB Loans

The European Central Bank said it will reintroduce year- long loans, giving banks access to unlimited cash through January 2013, and resume purchases of covered bonds to encourage lending. The Bank of England raised the ceiling for debt purchases known as quantitative easing to 275 billion pounds ($428 billion) in the biggest expansion since the first round of stimulus in March 2009.

“People are looking for optimism anywhere they can get it right now,” said Christopher Bury, co-head of fixed-income rates in New York at Jefferies Group Inc., one of the 22 primary dealers that trade with the Fed. “You have these random stories, and the market reacts.”

Italy’s foreign and local currency long-term issuer default ratings were cut yesterday by Fitch Ratings to A+ from AA-, while Spain’s were lowered to AA- from AA+. The outlook for both is negative.

U.S. government debt securities surged last quarter on speculation Greece was headed for default and as the Fed said after its Sept. 20-21 meeting that it would buy $400 billion of Treasuries with maturities of six to 30 years through June while selling an equal amount of securities due in three years or less. Minutes of the meeting are due Oct. 12.

Operation Twist

The central began the program on Oct. 3 with the purchase of $2.5 billion of securities maturing from February 2036 through August 2041.

Yields on 30-year bonds decreased 146 basis points in the third quarter, the most since falling 164 basis points in the last three months of December 2008.

“There was so much priced in about a double dip both here and in Europe,” said John Fath, a principal at the investment firm BTG Pactual in New York. “The market was expecting such bad data, it’s sort of a relief event,” he said, referring to yesterday’s payrolls report.

Pacific Investment Management Co.’s Bill Gross said employment gains in September that were almost double analysts’ forecasts aren’t enough to signal sustained growth in the U.S. economy.

The economy needs 200,000 to 250,000 added jobs per month to expand, said Gross, manager in Newport Beach, California, of the world’s biggest bond fund, in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

The U.S. will auction $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in offerings beginning Oct. 11.

“Supply has been on traders’ minds over the last couple of days, and this should add pressure to yields,” said Paul Montaquila, head of fixed-income trading in San Ramon, California, at Bank of the West.

--With assistance from Daniel Kruger in New York. Editors: Dennis Fitzgerald, Paul Cox

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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