Bloomberg News

Treasuries Fall as Better Job Gains Slow Fed Speculation

August 03, 2012

Treasuries fell after a government report showed the U.S. economy added more jobs than forecast last month, decreasing speculation the Federal Reserve will resort to a third round of asset purchases.

Ten-year note yields rose from almost record lows earlier as members of German Chancellor Angela Merkel’s coalition parties signaled they won’t stand in the way of European Central Bank chief Mario Draghi’s plan to buy government bonds. The Fed said Aug. 1 after a policy meeting it “will provide additional accommodation as needed” to spur growth and employment, a tactic known as quantitative easing, or QE, while it refrained from expanding monetary stimulation this month.

“The economy is healing, but healing gradually,” Mohamed El-Erian, chief executive officer of the Newport Beach, California-based Pacific Investment Management Co., said in an interview on Bloomberg Television’s “In the Loop” with Betty Liu. “It’s not strong enough to suggest the economy is going to take off. It’s not weak enough to confirm the Fed is going to come in.”

The 10-year yield rose eight basis points, or 0.08 percentage point, to 1.56 percent at 10:14 a.m. in New York, according to Bloomberg Bond Trader prices.

Payrolls increased 163,000 following a revised 64,000 rise in June that was less than initially reported, Labor Department figures showed in Washington. The median estimate of 89 economists surveyed by Bloomberg News called for a gain of 100,000. Unemployment rose to 8.3 percent.

‘Breathing Space’

The Institute for Supply Management’s non-manufacturing index rose to 52.6 in July from the prior month’s 52.1, the Tempe, Arizona-based group said today. Economists in a Bloomberg survey forecast the index would remain unchanged at 52.1 in July. Fifty is the dividing line between expansion and contraction.

“It gives them some breathing space” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “The job situation is paramount as far as the Fed is concerned. They can take their foot off the accelerator.”

The Federal Open Market Committee said at the conclusion of a two-day meeting in Washington that economic activity had “decelerated somewhat” over the first half of the year and it would “provide additional accommodation as needed.”

Central banks, including the Fed, have stepped in to bolster the economy as global growth has slowed and as hiring in the U.S. has dropped off from a 19-month high of 275,000 in January.

Operation Twist

The Fed said June 20 that it would enlarge its program known as Operation Twist, in which it is replacing shorter-term securities from its Treasury holdings with longer-term securities to $667 billion from $400 billion. The central bank has purchased in two rounds of quantitative easing $2.3 trillion of government and mortgage securities to help lower private sector and government borrowing costs.

Ten-year yields will climb to 1.84 percent by year-end, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings. The yield has averaged 3.14 percent over the past five years.

Ten-year notes have returned 5.3 percent this year, compared with a 2.8 percent gain by Treasuries overall, according to Bank of America Merrill Lynch indexes.

Longer-dated maturities led declines earlier on speculation the European Central Bank will soon come up with measures to calm the euro-region bond market damped demand for the safest assets.

‘Short End’

Draghi said yesterday any bond purchases would focus “on the short end of the yield curve.” He also left open the question on whether the bank would neutralize future bond purchases, a step it has taken with all of its interventions to date.

The envisaged move to purchase troubled euro states’ government bonds is “a wise middle way” to solve the region’s debt crisis, Elmar Brok, a European Parliament lawmaker and executive-committee member of Merkel’s Christian Democratic Union party, told Deutschlandfunk radio today.

The term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, shows Treasuries are almost the most expensive ever. The gauge was minus 0.91 today, after falling to a record minus 1.02 on July 24.

A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Break-Even Rate

The five-year, five-year forward break-even rate, a measure of inflation expectations that the Fed uses to help guide monetary policy, climbed to 2.57 percent as of July 31 from 2.38 percent on July 28. The gauge has averaged 2.75 percent over the past decade.

The U.S. central bank plans to sell as much as $8 billion of Treasuries due from January 2013 to June 2013 today, according to the Fed Bank of New York’s website. The sales are part of Chairman Ben S. Bernanke’s plan to contain borrowing costs by swapping short-term Treasuries in its holdings for longer maturities.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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