Bloomberg News

Treasuries Little Changed Before Non-Farm Payrolls Report

December 07, 2012

U.S. Treasuries were little changed, headed for a weekly advance, before a report today that economists forecast will show the world’s largest economy added jobs at the slowest pace since June.

Ten-year yields were two basis points from a three-week low. U.S. non-farm payrolls rose by 85,000 workers following a 171,000 increase in October, according to the median forecast of 91 economists in a Bloomberg News survey. Further gains may be limited as the 10-year term premium, a model created by Federal Reserve economists that includes expectations for interest rates, growth and inflation, showed Treasuries approached the most expensive level on record.

“There are still a lot of uncertainties in the U.S. economy both in terms of data and on the fiscal outlook,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “These factors are keeping bond yield levels down.”

Benchmark 10-year note yields were at 1.58 percent as of 6:55 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in November 2022 was 100 12/32. The yield fell to 1.56 percent yesterday, the least since Nov. 16. Thirty-year yields were little changed at 2.77 percent.

The 10-year term premium was negative 0.96 percent, versus the all-time low of minus 1.02 percent set in July. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasuries have returned 2.8 percent this year, versus 4.3 percent for German bonds and 2.9 percent for U.K. gilts, according to Bank of America Merrill Lynch indexes.

Unemployment

The jobless rate held at 7.9 percent, another survey showed before the Labor Department reports the number at 8:30 a.m. today in Washington.

The forecast is fueling speculation the Fed is preparing to announce a new round of bond purchases for 2013 at its next meeting Dec. 11-12 to spur the economy. Policy makers said Sept. 13 they will buy bonds, a policy known as quantitative easing, or QE, until the job market improves “substantially.”

The approach of the U.S. fiscal cliff of spending cuts and tax increases next year is also threatening to slow growth, as lawmakers work to amend the measures before they begin to take effect in January.

Shin Kong Life, with the equivalent of $55.5 billion in assets, sold Treasuries last week, said Will Tseng, who trades U.S. bonds for the company in Taipei.

Ten-year rates will rise to 2.27 percent in the U.S. and to 1.12 percent in Japan by the end of next year, based on Bloomberg surveys of economists, with the most recent forecasts given the heaviest weightings.

‘Too Slow’

“The economy is too slow for the Fed,” Tseng said by telephone yesterday. “The market is pricing in new QE already,” which will make it difficult for rates to fall further, he said.

Tseng said he would like to buy if yields approach 1.8 percent.

Diam Co., which manages the equivalent of $121.7 billion, sold earlier this week, said Hajime Nagata, an investor at the company in Tokyo.

“Yields are at a really low level,” he said in a telephone interview yesterday. “We need to see something like the fiscal cliff failing to push yields lower.”

Cliff Negotiations

Budget negotiations in Washington will probably result in a compromise that will damp the expansion and send 10-year rates down to 1.5 percent or less, said Bin Gao, an interest-rate strategist in Hong Kong at Bank of America Corp. The company’s Merrill Lynch unit is one of the 21 primary dealers that underwrite the U.S. debt.

“Even if they reach an agreement, we will still be faced with fiscal tightening,” Gao said.

Two Senate Democratic leaders signaled yesterday they may have to accept cuts to U.S. entitlement programs to win a deficit-reduction deal, after some Republicans expressed willingness to discuss higher tax rates for top earners.

The Fed is snapping up $40 billion of mortgage bonds a month to put downward pressure on borrowing costs.

It is also exchanging about $45 billion of short-term Treasuries from its holdings for longer-term debt each month under a program scheduled to end by Dec. 31.

The central bank plans to sell as much as $8 billion of securities maturing from November 2013 to February 2015 today, according to the Fed Bank of New York’s website.

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said investors should avoid longer-term Treasuries because policies to spur growth will boost inflation.

Gross recommended Treasury Inflation Protected Securities, in a report on the Newport Beach, California-based company’s website this week.

The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, was 2.72 percent. It has averaged 2.75 percent for the past decade.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net


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