Bloomberg News

Treasury Bonds Fall for Second Day Before Jobs Report, Supply

February 02, 2012

Feb. 2 (Bloomberg) -- Treasury bonds fell for a second day, pushing yields above 3 percent, as a report showing a decline in weekly U.S. jobless claims added to speculation the Labor Department will say employers added workers last month.

The yield on the benchmark 10-year note still traded at almost the lowest level in four months. U.S. sovereign debt is lagging behind company bonds this year as the world’s biggest economy shows signs of improvement. Treasuries have returned 0.2 percent, versus 2.2 percent for company debt, according to Bank of America Merrill Lynch indexes. The U.S. is scheduled to sell $72 billion in notes and bonds next week.

“This is where the market wants the bond to be -- north of three percent,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “A lot of it is cheapening ahead of next week’s long-end supply.”

The 30-year bond yield rose one basis point, or 0.01 percentage point, to 3 percent at 4:59 p.m. in New York after rising five basis points yesterday, according to Bloomberg Bond Trader prices. The price of the 3.125 percent security maturing in November 2041 fell 7/32, or $2.19 per $1,000 face value, to 102 3/8.

Yields on 10-year notes were little changed at 1.82 percent. The yield reached 1.79 percent on Jan. 31, the lowest since Oct. 4.

Jobs Update

Applications for unemployment insurance payments dropped by 12,000 to 367,000 in the week ended Jan. 28, Labor Department figures showed today in Washington. The median forecast of 46 economists in a Bloomberg News survey projected 371,000 claims.

A Labor Department report tomorrow is forecast to show the U.S. added 140,000 jobs, compared with 200,000 the previous month.

The unemployment rate is forecast to remain steady at 8.5 percent, economists said.

“We’ve had numbers that are fairly robust,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “The community is getting apathetic.”

A Fed measure of perceived risk associated with extending debt maturities, the so-called term premium, tumbled to negative 0.79 percent today, the most expensive level ever. A negative reading represents overvalued levels and indicates investors are demanding premiums below what’s considered fair value.

Fed Purchases

Federal Reserve Bank of Chicago President Charles Evans said the central bank needs a clear low-rate commitment or a third round of purchases of Treasuries and mortgage bonds to further stimulate a still struggling economy.

People outside the Fed have “mentioned that maybe you needed to do well over a trillion dollars in asset purchases in order to begin to move things,” the regional chief told reporters today during a meeting at the bank. “I don’t have a particular number in mind, but it would be more ambitious than most numbers being bandied about.”

Evans reiterated his view that the central bank should keep the benchmark U.S. interest rate near zero until unemployment falls below 7 percent or medium-term inflation rises above 3 percent, and underscored his position as the Fed’s most vocal proponent for easing.

Policy makers said Jan. 25 that they will keep their benchmark interest rate at virtually zero until at least the end of 2014, and Chairman Ben S. Bernanke said he’s considering buying bonds to sustain the expansion.

Portfolio Shift

The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and spur the economy under a program it plans to conclude in June. The central bank said Jan. 31 it will buy about $45 billion of securities and sell about $43 billion during February.

The Fed purchased $4.95 billion of securities due from May 2020 to November 2021 today as part of the plan, according to the New York Fed’s website.

Bernanke, 58, said today the central bank will seek to keep prices rising at a 2 percent rate and rejected suggestions that it would sacrifice its inflation goal to boost employment.

The Fed chairman said that the economy has shown signs of improvement while remaining vulnerable to shocks, and he called on lawmakers to reduce the long-term U.S. budget deficit.

Bernanke’s View

“Fortunately, over the past few months, indicators of spending, production, and job-market activity have shown some signs of improvement,” Bernanke said today, according to prepared testimony to the House Budget Committee in Washington. “The outlook remains uncertain, however, and close monitoring of economic developments will remain necessary.”

Swap spreads narrowed, indicating demand for higher- yielding assets versus sovereign debt. The difference between the two-year swap fixed rate and the yield on similar-maturity Treasuries dropped to a six-month low of 25 basis points. Investors use swaps to exchange fixed and floating interest-rate obligations.

Volatility in the Treasury market is near an eight-month low with the Fed pledging last week to keep borrowing costs at record lows through 2014. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed today at 70.2, the lowest since July 2007 and less than the five-year average of 111.8.

The U.S. announced it will sell $72 billion in notes and bonds next week. It will sell $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in bonds on three consecutive days beginning Feb. 7. The sizes are the same sold in each refunding month since November 2010. Quarterly refundings are held each February, May, August and November.

The U.S. auctioned three-year notes on Jan. 10 at the highest demand on record. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered was 3.73, the highest since at least 1993 when the government began releasing the data. The notes drew a yield of 0.37 percent, near the record low of 0.334 percent reached at the sale in September. The note traded today at 0.3 percent.

--With assistance from Aki Ito and Vivien Lou Chen in San Francisco. Editors: Paul Cox, Dave Liedtka

To contact the reporter on this story: 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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