Bloomberg News

Treasuries Poised for Weekly Gain on Jobs Outlook, Euro Crisis

November 04, 2011

Nov. 4 (Bloomberg) -- Treasury 10-year notes headed for their biggest weekly gain since August before a report that may show U.S. employers took on fewer workers last month and as European leaders struggled to stem the region’s debt crisis.

Ten-year yields were about 15 basis points from the lowest since Oct. 6. Payrolls rose by 95,000 after a 103,000 September increase, according to the median forecast of 91 economists surveyed by Bloomberg News before the Labor Department reports the figure today. Billionaire investor George Soros said Greece faces the danger of a disorderly default, raising the specter of a run on lenders in other countries.

“Investors remain in a relatively risk-averse mood and that’s giving support to the Treasury market,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. Treasuries “have been at the mercy of Europe. Today’s employment report should show the U.S. economy is not slipping into recession which could well take a bit of shine off the U.S. government bond market,” he said.

Ten-year note yields were at 2.08 percent at 7:22 a.m. New York time, according to Bloomberg Bond Trader prices. The 2.125 percent securities maturing in August 2021 traded at 100 13/32. The yield slid 24 basis points this week, the most since the period ended Aug. 12.

The U.S. unemployment rate stayed at 9.1 percent in October, a separate Bloomberg survey showed.

“Data in general has been surprising to the upside in the U.S. so there may be some investors who are a bit nervous payrolls might turn out a bit stronger than the market forecast,” said Stamenkovic.

Referendum Canceled

The Citigroup Economic Surprise Index, which shows whether U.S. data beat or fell short of forecasts, has climbed to 13.6 from this year’s low of negative 117.2 in June.

Group of 20 leaders meeting in Cannes, France, yesterday pushed European authorities to enact a week-old Greek rescue plan that has already shown signs of unraveling.

Greek Prime Minister George Papandreou was forced to back down yesterday over a proposed referendum after it split his party, sent the nation’s two-year borrowing costs soaring above 100 percent and drew warnings from European leaders that it may cost the nation its euro membership

Any Greek debt reduction “must be done in an orderly manner” and authorities need to ensure that Greek banks are “kept alive” and deposits are safe, Soros said in a speech in Budapest yesterday.

‘Disorderly Default’

“There’s a real danger of a disorderly default,” Soros said. Without support for the lenders, “you’re liable to have a run on the banks in other countries as well. That’s the danger of a meltdown.”

Ten-year Treasury yields were within 42 basis points of the record-low rate of 1.67 percent set on Sept. 23, raising concern demand will wane when the government sells $72 billion of coupon-bearing securities next week.

The U.S. plans to auction $32 billion of three-year notes on Nov. 8, $24 billion of 10-year debt on the following day and $16 billion of 30-year bonds on Nov. 10.

“Treasuries are definitely expensive,” said Tsutomu Komiya, one of the bond investors at Daiwa Asset Management Co. in Tokyo, which oversees the equivalent of $118.7 billion and is a unit of Japan’s second-biggest brokerage by market value.

The 10-year yield will advance to 2.21 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

Inflation Risk

The Fed announced in September it would replace $400 billion of short-maturity U.S. debt with longer-term securities to contain borrowing costs. It plans to purchase as much as $5 billion of Treasuries due from 2017 to 2019 today under the program, according its website.

Fed efforts to spur the economy risk speeding up inflation and driving long-term yields higher, Ajay Rajadhyaksha and Dean Maki, New York-based analysts at Barclays Capital, wrote in a report yesterday. The result will be a widening difference between seven- and 30-year rates, a so-called steepening of the yield curve, according to Barclays, one of the 21 primary dealers that trade with the central bank.

“The policy stance is already too accommodative,” according to the report. “Such a scenario supports higher long- term inflation expectations and a steeper curve.”

The seven- and 30-year yield spread was 1.63 percentage points, versus the average of 1.82 percentage points for the past year.

U.S. consumer prices rose 3.9 percent in September from a year earlier, meaning 10-year Treasuries yield minus 1.82 percent after accounting for costs in the economy. The figure was minus 2.11 percent in October, a level not seen since 1980.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, has widened to 2.10 percentage points from this year’s low of 1.67 percentage points in September.

--Editors: Daniel Tilles, Nicholas Reynolds

To contact the reporter on this story: Lucy Meakin in London at lmeakin1@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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