Treasury traders increased bets on inflation to the most in eight weeks after a bigger-than- forecast jobs gain spurred optimism the economy will pick up.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to as much as 2.21 percentage points. It was the most since June 11. The average over the past decade is 2.15 percentage points.
“The U.S. economy continues to recover,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “The labor statistics are pushing up inflation expectations. The rally is over” for Treasuries, he said.
Benchmark 10-year yields were little changed at 1.56 percent as of 7:07 a.m. in London, according to Bloomberg Bond Trader prices. The price of the 1.75 percent security due in May 2022 was 101 22/32.
Yields have climbed from the record of 1.38 percent set July 25. They will rise to 2 percent by year-end, Shimazu said.
Japan’s 10-year rate increased 0.5 basis point to 0.735 percent today. It reached 0.72 percent, the lowest since 2003, last month. A basis point is 0.01 percentage point.
U.S. five-year inflation swaps, which allow holders to exchange fixed interest rates for returns equivalent to the U.S. consumer price index, show investors expect prices to rise at average annual rate of 2.16 percent through August 2017. It was the highest level based on closing prices in 10 weeks. The average based on data compiled by Bloomberg that go back to 2004 is 2.32 percent.
The five-year, five-year forward break-even rate, a measure of inflation expectations the Federal Reserve uses to help guide monetary policy, climbed to 2.60 percent as of Aug. 1. It was the most in almost two months and compares to the decade-long average of 2.75 percent.
Treasuries fell last week as the U.S. employment report on Aug. 3 reduced speculation the Fed will increase its bond purchases to spur expansion.
Payrolls increased by 163,000 in July following a revised 64,000 gain in June that was less than initially reported, Labor Department figures showed. The median estimate of economists surveyed by Bloomberg News was for a July gain of 100,000. The jobless rate rose to 8.3 percent from 8.2 percent.
The U.S. central bank plans to buy as much as $5.5 billion of Treasuries due from August 2020 to May 2022 today, according to the Fed Bank of New York’s website. The purchases are part of Chairman Ben S. Bernanke’s plan to contain borrowing costs by swapping short-term Treasuries in its holdings for longer maturities.
Treasuries have returned 6.8 percent in the 12 months to Aug. 3, according to Bank of America Merrill Lynch indexes, reflecting demand for U.S. debt as a haven amid signs of slowing economic growth and as European governments struggled to find ways to pay their debts. An index of bonds around the world returned 6.5 percent, the bank’s figures show.
U.S. bonds rallied even after Standard & Poor’s lowered the nation’s long-term credit rating one step to AA+ from AAA on Aug. 5, 2011, benefiting from the flight to quality.
“Yields will stay fairly low for a little bit longer,” said Roger Bridges, who oversees $15.9 billion as the Sydney- based head of fixed income at Tyndall Investment Management Ltd., which is part of Nikko Asset Management Co. in Japan. “I don’t think we’re quite out of the woods yet.”
Of the 20 companies that own the most Treasuries, 16 bought more U.S. government debt during their most-recent reporting periods, Bloomberg data show.
Jay Mueller, who manages $3 billion of bonds for Wells Capital Management in Milwaukee, said he resisted buying Treasuries for four months, anticipating the Federal Reserve would drop its pledge to keep interest rates at a record low through late 2014.
Yet with the economy growing at a 1.5 percent annual pace, the odds of a recession have risen to 60 percent, making 1 percent yields on 10-year notes a possibility, he said. Wells Capital’s parent, Wells Fargo & Co., boosted its Treasury holdings 32 percent to $11.5 billion in May alone, according to the latest data compiled by Bloomberg.
“We’re in a low-rate environment for a long time, longer than I had thought,” Mueller said in a July 26 interview at Bloomberg headquarters in New York. “I’m finally throwing in the towel.”
So are Pioneer Investment Management Inc., Pacific Investment Management Co., Federated Investors Inc. (FII:US), Northern Trust Global Investments and Columbia Management Investment Advisers LLC.
Ten-year yields will increase to 1.82 percent by year-end, according to a Bloomberg survey of financial companies, with the most recent forecasts given the heaviest weightings. The projection has tumbled from 2.66 percent at the start of the year.
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