Bloomberg News

Treasuries Little Changed as Earnings Slowdown Tempers Jobs Gain

November 02, 2012

Treasuries were little changed, erasing losses posted after a report showed faster- than- projected jobs growth last month, as average hourly earnings were unchanged, raising concern the U.S. economy is struggling to accelerate.

Benchmark 10-year notes rose earlier today after the payrolls data, which comes four days before the U.S. presidential election. The report showed the U.S. added 171,000 jobs in October, compared with a forecast of 125,000 and a revised 148,000 gain the previous month, while the unemployment rate rose to 7.9 percent from 7.8 percent the month before.

“The rise in yields was just a knee-jerk data being stronger than expected,” said Ward McCarthy, chief financial economist at Jefferies & Co. Inc. in New York, one of the 21 primary dealers that trade with the Federal Reserve. “What we’ve seen since that time is indecisiveness as to what this data means as far as the election is concerned.”

The yield on 10-year notes was little changed at 1.72 percent at 5:02 p.m. New York time, after gaining as much as five basis points. The 1.625 percent note due in August 2022 traded at 99 6/32.

Thirty-year bond yields climbed one basis point to 2.91 percent, after touching 2.96 percent.

Futures Holdings

Hedge-fund managers and other large speculators more than doubled their net-long position in 10-year note futures in the week ending Oct. 30, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 169,456 contracts, the most this year, on the Chicago Board of Trade. Net-long positions rose by 90,160 contracts, or 114 percent, from a week earlier.

Treasury trading slowed, with volume reported by ICAP Plc, the largest inter-dealer broker of U.S. government debt, at $112.6 billion through 10 a.m., compared with $208.7 billion yesterday and $261.3 billion on Oct. 5, the date of the previous payrolls report. It has averaged $240.5 billion in 2012.

The Treasury is scheduled to sell $72 billion of securities next week, including $32 billion of three-year notes Nov. 6, $24 billion of 10-year debt Nov. 7 and $16 billion of 30-year bonds Nov. 8.

“Focus goes immediately to how do we set up for the auctions next week in light of the election and that fact that desks are still understaffed,” said Chris Ahrens, an interest- rate strategist at UBS Securities LLC in Stamford, Connecticut, a primary dealer. “You will have power next week, but whether you have these places mopped out and equipment ready to go is a question mark,” Ahrens said referring to damage in New York City and the region from Hurricane Sandy.

Earnings Slows

While employment improved, today’s report showed compensation lagged behind. Average hourly earnings were unchanged last month and climbed 1.6 percent in October from the same time last year, the smallest gain since comparable year- over-year records began in 2007. Earnings for production workers rose 1.1 percent in the 12 months to October, the weakest since records began in 1965.

“It’s nice that more people were employed, which is a positive and over time can be helpful, the income side of things was not as robust,” Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York one of 21 primary dealers that trade with the Fed. “With hourly earnings flat and the work-week actually down a tenth compared to the report last month, it’s a good report, but not a great report.”

U.S. consumer prices increased 2 percent in September from a year earlier, based on the latest data from the Labor Department, meaning 10-year notes have a negative real yield.

Inflation Reading

The difference between 10-year yields and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for costs in the economy over the life of the debt, was 2.48 percentage points. The average during the past decade is 2.18 percentage points.

Employment and the economy are central themes in the campaign, with President Barack Obama and Republican nominee Mitt Romney each trying to convince voters they can best energize the expansion and create jobs. The jobless rate had stayed above 8 percent since February 2009.

“It probably improves Obama’s prospects,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston.

Bond investors are better off during the Obama administration now than four years ago, Bank of America Merrill Lynch bond index data show.

Debt Returns

From Treasuries to mortgage securities to corporate bonds, returns on U.S. fixed-income assets have averaged 6.6 percent throughout Obama’s term, exceeding the 4.6 percent during the previous four years under George W. Bush, according to Bank of America indexes. Yields on America’s fixed-income assets yield nine basis points less than the global average, compared with 51 basis points more back then, the data shows.

U.S. government debt securities have returned 24.7 percent since the end of October 2008, including reinvested interest, or 5.7 percent a year, Bank of America Merrill Lynch’s U.S. Treasury Master Index shows. That compares with 21.6 percent for government debt worldwide, according to the firm’s indexes.

Fed Bank of Boston President Eric Rosengren said the central bank should buy mortgage bonds until the jobless rate falls to 7.25 percent and hold the target interest rate near zero until hitting 6.5 percent unemployment.

“As long as inflation and inflation expectations are expected to remain well-behaved in the medium term, we should continue to forcefully pursue asset purchases,” Rosengren said yesterday in a speech in Wellesley, Massachusetts.

Fed View

The Federal Open Market Committee said on Oct. 24 it will continue buying $40 billion in mortgage-backed securities each month, aiming to reduce unemployment. It reiterated that it will probably keep its benchmark interest rate close to zero at least through the middle of 2015.

The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years. The Fed sold $7.7 billion of securities maturing from February 2013 to April 2014, according to Fed Bank of New York’s website.

Pacific Investment Management Co.’s Bill Gross said the Fed will continue with accommodative monetary policies even with the U.S. economy adding more jobs than forecast last month.

“There is nothing the Fed can do but continue down this road,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene.

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