Bloomberg News

U.S. 10-Year Note Yield Rises From 4-Month Low on Factory Data

February 02, 2012

Feb. 1 (Bloomberg) -- Treasuries dropped, pushing 10-year note yields up from almost a four-month low, as U.S. manufacturing expanded in January at the fastest pace since June, crimping demand for the safety of government debt.

The benchmark note yield rose for the first time in six days as speculation Greek bondholders negotiating a debt restructuring may get a payment tied to a revival in economic growth fueled buying of riskier assets. The U.S. announced it will sell $72 billion in notes and bonds next week. Employers added 145,000 jobs last month, according to a Bloomberg survey of economists before a Labor Department report on Feb. 3.

“There’s still a little bit of optimism on the Greek deal we keep hearing about,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of 21 primary dealers that trade Treasuries with the Federal Reserve. “We have the refunding next week that people are starting to think about. You’ll see people looking to lighten up and not run the risk of a possible stronger employment number in front of supply next week.”

Yields on 10-year notes increased three basis points, or 0.03 percentage point, to 1.83 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The yield fell to 1.8 percent yesterday, the lowest since Oct. 4. The 2 percent securities maturing in November 2021 fell 1/4, or $2.50 per $1,000 face amount, to 101 17/32.

Historic Level

The yields slid to a record low 1.67 percent on Sept. 23. Five-year yields increased two basis points to 0.72 percent today after dropping to a record low 0.6981 percent yesterday.

The Standard & Poor’s 500 Index added 1 percent.

Volatility in the Treasury market is at 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, fell yesterday to 72.1, the least since May 31 and less than the five-year average of 111.8.

Swap spreads narrowed, indicating growing demand for higher-yielding assets versus sovereign debt. The difference between the two-year swap fixed rate and the yield on similar- maturity Treasuries touched 26.5 basis points today, the lowest level since August. Investors use swaps to exchange fixed and floating interest-rate obligations.

Debt Sales

The Treasury announced 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 auctions will raise $22.4 billion of new cash as maturing securities held by the public total $49.6 billion.

“We have supply considerations,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Federal Reserve. “We may see more concessions.”

Pacific Investment Management Co.’s Bill Gross said recent actions by central banks provide assurances that short and intermediate bond yields won’t change, though any potential for price appreciation is limited.

“Monetary and fiscal excesses carry with them explicit costs,” Gross wrote. “My intent really is to alert you, the reader, to the significant costs that may be ahead for a global economy and financial marketplace still functioning under the assumption that cheap and abundant central bank credit is always a positive dynamic.”

Term Premium

A Fed measure of perceived risk associated with extending debt maturities, the so-called term premium, tumbled to negative 0.79 percent yesterday, the most expensive level ever. The gauge rose to negative 0.77 percent today. A negative reading represents overvalued levels and indicates investors are demanding premiums below what’s considered fair value.

The Fed purchased $1.75 billion of Treasuries due August 2022 to May 2030 as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

The Treasury Borrowing Advisory Committee unanimously recommended that the government allow for its auctions of bills to price at negative yields “as soon as logistically practical,” according to the group’s Jan. 31 report to Treasury Secretary Timothy Geithner, which was released today.

Zero Rates

The 13-member committee, which includes representatives from five primary dealer firms as well as investment companies including BlackRock Inc. and Pimco, said “that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function.”

The Institute for Supply Management’s U.S. manufacturing index rose to 54.1 in January from 53.1 in December, the Tempe, Arizona-based group’s data showed today. Fifty is the dividing line between growth and contraction, and the median forecast in a Bloomberg News survey called for an increase to 54.5. Estimates of the 80 economists surveyed ranged from 53 to 56.

Treasuries briefly pared losses earlier as companies added 170,000 workers in January, according to Roseland, New Jersey- based ADP Employer Services. The median projections of economists surveyed by Bloomberg News called for an advance of 182,000. The increase followed a revised 292,000 rise the prior month that was less than previously reported.

A Labor Department report Feb. 3 is forecast to show the U.S. added 145,000 jobs, according to 81 economists in a separate survey, compared with 200,000 the previous month.

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

“People are lightening up ahead of the nonfarm payrolls,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in Fixed income assets. “The ADP number was in line with expectations and speaks toward a decent, but not a great payroll for Friday.”

--Editors: Paul Cox, Dave Liedtka

To contact the reporters on this story: Susanne Walker in New York at; Daniel Kruger in New York at

To contact the editor responsible for this story: Dave Liedtka at

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