Bloomberg News

Treasuries Head for Weekly Drop on Speculation U.S. Added Jobs

January 06, 2012

Jan. 6 (Bloomberg) -- Treasuries headed for a weekly drop before a report analysts said will show U.S. hiring accelerated last month, signaling the economy may be gathering momentum and sapping demand for the safest assets.

A rally that drove Treasuries last year to their best returns since 2008 may be at risk of petering out as signs of improvement in the world’s biggest economy curb the flight to safety spurred by Europe’s debt crisis. Payrolls rose by 155,000 in December after climbing 120,000 a month earlier, the median forecast of 84 economists surveyed by Bloomberg News showed.

“For a while now the U.S. recovery has exceeded expectations and that has continued into the new year,” said Richard McGuire, a senior fixed-income strategist at Rabobank International in London. “If you get a banner non-farm payrolls report today, then certainly that should send yields significantly higher.”

Ten-year yields were little changed at 2.01 percent at 6:54 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 traded at 99 31/32. The yield climbed 12 basis points, or 0.12 percentage point, in a shortened week following the New Year’s holiday.

Two-year yields were also little changed today, at 0.26 percent, and the difference between five- and 30-year yields widened to as much as 2.19 percentage points, the most in more than three weeks.

The Stoxx Europe 600 Index advanced 0.5 percent. Futures on the Standard & Poor’s 500 Index rose 0.2 percent.

Job Growth

Federal Reserve holdings of Treasuries on behalf of foreign central banks fell to $2.67 trillion in the week ended Jan. 4, the least since April, Fed data show.

The U.S. unemployment rate probably increased to 8.7 percent from 8.6 percent, a separate survey showed.

The job gains won’t be enough to get Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, to start betting against Treasuries. Nakamura, who helps oversee the equivalent of $42.6 billion at the unit of Japan’s second- largest bank, correctly predicted 2011’s advance.

“The rally will continue,” he said. “The employment situation is the same as last year. Personal income is weakening. Home prices continue to slow. These are all negative for consumer spending.”

Ten-year yields will drop to a record 1.50 percent by Dec. 31, he said. The yield declined to an all-time low of 1.67 percent on Sept. 23.

European Crisis

Stronger employment figures probably won’t be enough to reverse the negative economic influence of the European debt crisis, according to Bank of America Merrill Lynch, one of 21 primary dealers that trade with the Fed.

“Even a handful of very strong employment numbers would not do much to fill the sheer magnitude of the excess capacity in the U.S. labor market and its concomitant disinflationary pressure,” New York-based John Shin, a currency strategist, and Michelle Meyer, an economist, wrote in a report yesterday.

Treasuries gained after the previous employment report Dec. 2, pushing the 10-year yield down five basis points, even after the jobless rate slid to the lowest level since 2009, because investors focused on Europe instead of the U.S.

As the world’s largest economy shows signs of strengthening, the outlook for Europe has deteriorated. U.S. gross domestic product will grow 2.1 percent in 2012, compared with 1.8 percent in 2011 and 1.25 percent for all Group of 10 nations, Bloomberg surveys of economists show. The euro-area economy will contract 0.2 percent, another survey shows.

‘Countervailing Forces’

Yields on the 10-year bonds of Italy, which has more than $2 trillion of debt, are above the 7 percent level that preceded bailouts for Greece, Ireland and Portugal from the European Union and the International Monetary Fund.

Data today added to concern, showing European confidence in the economic outlook slumped to the lowest in more than two years and unemployment remained at a 13-year high.

“What we’re subject to is countervailing forces,” said Rabobank’s McGuire. “You’ve got the stronger recovery in the U.S., plus ongoing concerns at the euro zone periphery which have yet to be addressed. The question is, on a longer term horizon, which is likely to hold sway.’

Forecasts compiled by Bloomberg show economists predict that Treasury yields will rise this year. Ten-year rates will advance to 2.69 percent by Dec. 31, according to a Bloomberg survey, with the most recent forecasts given the heaviest weightings.

ADP Report

Treasuries fell yesterday after ADP Employer Services reported that companies added 325,000 workers last month, the most in records going back to 2001, and as the government said initial jobless claims decreased last week.

U.S. government securities have handed investors a 0.5 percent loss in January as of yesterday, after returning 9.8 percent last year, Bank of America data show.

The spread between yields on two-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 1.73 percentage points, the most in five months.

--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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