Bloomberg News

Treasuries Fall as U.S. Payrolls Exceed Forecast, Dim Fed Easing Prospects

March 09, 2012

Treasuries fell as U.S. payrolls increased by more than 200,000 for a third straight month, adding to speculation the Federal Reserve will avoid more monetary stimulus as the recovery builds momentum.

Yields on benchmark 10-year notes reached the highest in a week as demand for the relative safety of U.S. debt was also damped after the Greek government said it reached its target in the biggest sovereign restructuring in history. The agreement triggered credit-default swaps, a derivatives trade group determined. Interest-rate swap spreads indicate increasing demand for yields higher than those on Treasuries.

“The data definitely shows strengthening in the economy, and three straight months of very solid job numbers shows that there is some consistency, which weighs on Treasuries,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse Group AG, one of 21 primary dealers that trade directly with the Fed. “The market will need more to break us out of the range we’ve been in for several months as we still have a long way to go.”

Yields (USGG10YR) on 10-year notes rose two basis points, or 0.02 percentage point, to 2.03 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent securities due in February 2022 decreased 1/8, or $1.25 per $1,000 face amount, to 99 3/4.

The benchmark yields reached as high as 2.06 percent, the most since March 1. Ten-year yields are up five basis points this week. They reached a record low 1.67 percent in September.

Gain in Payrolls

The 227,000 increase in payrolls followed a revised 284,000 gain in January that was bigger than first estimated, Labor Department figures showed today. Job growth over the past six months was the strongest since 2006. The median projection of economists in a Bloomberg News survey called for a 210,000 rise in February employment. The jobless rate stayed at 8.3 percent.

The difference between the two-year swap rate and the yield on U.S. debt of a similar maturity touched 23.9 basis points today, the lowest in almost seven months.

U.S. government bonds have lost 0.5 percent this year, while corporate debt has returned 3.2 percent, according to Bank of America Merrill Lynch indexes.

The 10-year note yields have been in a range of 1.79 percent to 2.09 percent this year amid Europe’s sovereign-debt crisis and the Fed’s policy of keeping borrowing rates at record lows to spur growth.

‘Flock Back’

“Any dip in yields and buyers flock back to Treasuries,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, a primary dealer. “If the events of this week can’t take us out of the range, it’s unclear what will, and it underscores how strong the demand for Treasuries has been.”

Greece said today it has a 95.7 percent participation rate among investors after it received approval to activate so-called collective action clauses. The use of the clauses will trigger payouts on $3 billion of default insurance, the International Swaps & Derivatives Association said.

A total of 4,323 credit-default swap contracts can now be settled after ISDA’s determinations committee ruled the use of CACs is a restructuring credit event. Before the ruling, Greek swaps rose to a record $7.68 million in advance and $100,000 annually to insure $10 million of debt for five years.

The decision was unanimous, New York-based ISDA said today in a statement distributed by Business Wire. An auction to set the size of the payouts will be held March 19.

‘Turn the Page’

“You want to turn the page on these guys, but it’s unbelievable,” said Sean Murphy, a trader in New York at Societe Generale SA, a primary dealer. “You can’t believe it’s the end of the problems for Europe.”

The payrolls report and Greece’s restructuring agreement came as the U.S. government prepared to sell $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds next week. The auctions will take place over three days starting March 12.

“Eventually the siren song of a steeper yield curve and better compensation for duration will pull people out the curve,” William O’Donnell, head U.S. government-bond strategist in Stamford, Connecticut, at RBS Securities Inc., a primary dealer. “I wouldn’t be surprised to see very good auctions related to that next week if we can hold these higher levels.”

Ten-year note yields climbed as much as 13 basis points on Feb. 3, the biggest intraday jump since Nov. 10, as January’s unemployment rate unexpectedly decreased and payrolls grew more than forecast.

Fed Meeting

The Federal Open Market Committee, which sets interest-rate policy, meets March 13 amid speculation that improvements in economic data have reduced the likelihood it will initiate a third round of asset purchases under quantitative easing.

Fed Chairman Ben S. Bernanke said on Jan. 25, after the FOMC’s last meeting, that policy makers were considering additional asset purchases to boost growth. The central bank also extended a pledge to keep the benchmark interest rate at almost zero through at least late 2014.

Policy makers were “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Bernanke said at a news conference. Bond buying is “an option that’s certainly on the table,” he said.

Bernanke Testimony

In congressional testimony last week, Bernanke refrained from indicating that the central bank would boost stimulus. The Commerce Department on Feb. 29 raised its estimate for U.S. economic growth for the fourth quarter to 3 percent, from 2.8 percent, and the Conference Board’s gauge of confidence among consumers climbed in February to the highest level in a year.

The Fed bought $2.3 trillion of bonds in two rounds of quantitative easing from December 2008 until June 2011 to spur the economy. In September it announced it would buy $400 billion of longer-term U.S. securities through June while selling an equal amount of shorter-term debt in its holdings to lower borrowing costs. The central bank’s target rate for overnight bank lending has been zero to 0.25 percent since December 2008.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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