Bloomberg News

Treasuries Fall as Job Gains Cast Doubt on Fed’s Low-Rate Policy

February 05, 2012

Feb. 4 (Bloomberg) -- Treasuries declined after the U.S. jobless rate unexpectedly fell to the lease in three years, raising skepticism about Federal Reserve Chairman Ben S. Bernanke’s extended low-rate policy and limiting demand for the safety of U.S. debt.

Yields on 30-year bonds reached the highest level in more than a week as the economy added more jobs in January than forecast, easing concern Europe’s debt crisis is stalling the U.S. recovery. The difference between yields on 10-year notes and the inflation-indexed securities of the same maturity touched the widest since October. The U.S. will sell $72 billion in notes and bonds next week.

“The pressure is on the back end of the market,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “There are fears of inflation and fears Bernanke won’t be able to stop the inflation he thinks he can. This back-up makes it more palpable to buy the auctions. Those are nice concessions.”

Yields on benchmark 10-year notes rose three basis points for the week, or 0.03 percentage point, to 1.92 percent in New York, according to Bloomberg Bond Trader prices. The 2 percent securities maturing in November 2021 fell 9/32, or $2.81 per $1,000 face amount, to 100 22/32. The yield advanced as much as 13 basis points yesterday, the largest intraday gain since Nov. 10.

A drop of more than three points in 30-year bonds yesterday pushed yields up as much as 16 basis points to 3.16 percent, the highest level since Jan. 25. The yield was up six basis points during the week. Five-year note yields set a record low of 0.6960 percent yesterday before the jobs data were released.

Market Measure

The difference between yields on 10-year notes and Treasury Inflation Protected Securities touched 2.19 percentage points yesterday, the widest since Oct. 28. The so-called break-even rate, which reflects the outlook among traders for consumer prices, averaged 2.03 percentage points during the past five years.

“The bond bulls are shaking in their boots,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade directly with the Fed. “The rates market is not just driven by the Fed. It’s driven by the path of the economy. Investors won’t take these low rates for longer if the economic numbers continue to post as well as they have. Investors get fearful of inflation.”

A Fed measure of perceived risk associated with extending debt maturities, the so-called term premium, rose to 0.7 percent yesterday, after tumbling Feb. 2 to negative 0.79 percent, the most expensive level ever. A negative reading represents overvalued levels and indicates investors are demanding premiums below what’s considered fair value.

Three Auctions

The U.S. will sell $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days beginning Feb. 7. The sizes are the same sold in each refunding month since November 2010. The auctions will raise $22.4 billion of new cash as maturing securities held by the public total $49.6 billion.

The U.S. previously 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, almost the record low of 0.334 percent reached at the sale in September. The three-year note traded yesterday at 0.32 percent.

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.

Borrowing Advice

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

The U.S. will auction bills maturing from four weeks to one year on Feb. 6 and Feb. 7.

Volatility in the Treasury market is at almost an eight- month low. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, closed Feb. 2 at 70.2, the lowest since July 2007 and less than the five-year average of 111.8.

Bond Returns

Treasuries returned 0.3 percent in 2012 as of Feb. 2, versus 2.2 percent for company debt, according to Bank of America Merrill Lynch indexes.

U.S. debt securities fell yesterday after the Labor Department said employers added 243,000 jobs in January after an increase of 203,000 positions in the previous month. The median forecast of 89 economists in a Bloomberg News survey was for an increase of 140,000 jobs. The jobless rate fell to 8.3 percent.

Gains in employment in January were broad-based, including manufacturing, construction, temporary help agencies, accounting firms, restaurants and retailers.

“It’s a solid report all around,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets, a primary dealer. “In some ways it removes some of the negative sentiment that had been building toward the economic backdrop. It’s certainly encouraging.”

At a meeting last month, the Fed pledged to keep its interest rate almost zero until late 2014.

Bernanke on Feb. 7 will testify to the Senate Budget Committee on the economic outlook and the federal budget situation. Bernanke said after a two-day policy meeting Jan. 24- 25 that the central bank is considering additional asset purchases to boost growth after extending its pledge to keep interest rates low through at least late 2014.

The central bank purchased $2.3 trillion of Treasury and mortgage-related bonds in two rounds of quantitative easing that ended in June. The Fed is in the process of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs.

--Editors: Paul Cox, Dennis Fitzgerald

To contact the reporters 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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