Bloomberg News

Treasuries Little Changed Before U.S. Employment Report

July 06, 2012

Treasuries were little changed before a report forecast to show the U.S. economy is struggling to create enough jobs to bring down unemployment, underpinning demand for the safest assets.

U.S. securities headed for their biggest weekly gain in a month after the European Central Bank and People’s Bank of China both cut interest rates yesterday and the Bank of England increased its asset-purchase program. Slowing growth and inflation are increasing pressure on the Federal Reserve to start a third round of bond purchases. The Fed bought $2.3 trillion of debt in two rounds of so-called quantitative easing from 2008 to 2011 to help cap borrowing costs.

“A weak payroll number has the potential to support Treasuries,” said Peter Schaffrik, head of European interest- rate strategy at Royal Bank of Canada in London. “There’s been a positive tone in the Treasury market this week as we saw the central banks cutting rates.”

The benchmark 10-year yield declined one basis point, or 0.01 percentage point, to 1.59 percent at 8:12 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2022 advanced 1/32, or 31 cents per $1,000 face amount, to 101 15/32. Yields had dropped seven basis points this week, the most since the period ending June 1.

U.S. employers hired 100,000 workers last month after a 69,000 gain in May, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department report. The unemployment rate stayed at 8.2 percent, a separate Bloomberg survey showed.

Slower-than-expected job growth in the May data released on June 1 sent 10-year yields to a record low 1.4387 percent.

‘High Probability’

“There is a high probability they will do QE3 this year,” said Hiromasa Nakamura, who helps oversee the equivalent of $41.2 billion as an investor at Mizuho Asset Management Co. in Tokyo. “The economic situation is weak, and the inflation numbers are declining. These factors will cause U.S. yields to decline.”

There were signs of improvement in job data released yesterday. Fewer Americans filed first-time claims for unemployment insurance payments, a government report showed, and companies added more workers than economists forecast, based on an industry survey.

Goldman Sachs Group Inc., one of the 21 primary dealers that trade directly with the Fed, increased its forecast for today’s employment figure to 125,000 from 75,000, according to a report by economists led by Jan Hatzius in New York.

‘Bull Trend’

Ten-year Treasury yields need to fall below 1.55 percent to confirm a resumption of the notes’ underlying “bull trend” and decline toward the record low, analysts including David Sneddon, head of technical-analysis research at Credit Suisse Group AG in London, wrote in a note to investors.

Treasuries rallied yesterday as the ECB reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero. President Mario Draghi said “economic growth in the euro area continues to remain weak with heightened uncertainty weighing on both confidence and sentiment.”

German bunds also advanced today, pushing two-year yields below zero, as investors sought the safest assets.

The Fed will probably increase its efforts to spur growth before year-end, said Timothy Bitsberger, a managing director in New York at BNP Paribas SA and a former assistant secretary for financial markets at the Treasury Department. BNP is also a primary dealer.

“I would expect the Fed to do QE3 at some point in the next few months,” Bitsberger said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. “There are some pretty strong headwinds we need to get through.”

Operation Twist

The Fed on June 20 expanded its program to replace $400 billion of short-maturity Treasuries in its portfolio with longer-term debt to lengthen the average maturity of its holdings, known as Operation Twist, by $267 billion and extended it until year-end.

The central bank plans to sell as much as $8 billion of Treasuries maturing from January 2013 to June 2013 today as part of the debt swap, according to the Fed Bank of New York website.

Chungkeun Oh, who invests in bonds in the biggest markets for Industrial Bank of Korea (024110), South Korea’s largest lender to small- and medium-sized companies, said he trimmed his holdings of Treasuries in July.

“I’m a bit bearish,” Oh said. “This yield has already priced in a weak employment report and a slowdown in growth.”

The term premium, a model created by economists at the Fed, indicates Treasuries are overvalued. The gauge was negative 0.92 today, the lowest since falling to a record negative 0.94 on June 1. A negative reading indicates investors are willing to accept yields below what is considered fair value.

Treasuries have returned 2 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Ten-year yields will climb to 2.12 percent by year-end, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings. The yield has averaged 3.2 percent over the past five years.

To contact the reporters on this story: Emma Charlton in London at echarlton1@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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