Treasuries fell for a sixth consecutive week as higher-than-forecast employment growth supported speculation the Federal Reserve will taper its bond-buying program with economic growth exhibiting momentum.
Yields on benchmark 10-year notes sustained their longest streak of weekly increases in four years even with the Labor Department’s report showing the unemployment rate rose to 7.6 percent in May. The Fed will trim its monthly purchases of Treasuries and mortgages to $65 billion in October, a smaller cut than previously forecast, from the current $85 billion, economists in a Bloomberg survey projected before the report.
“The economy is showing that things are getting better,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “I don’t think the Fed is going to wait until the race is over. The market is trying to figure out what will be a fair number.”
The 10-year note yield climbed 10 basis points, or 0.10 percentage point, to 2.17 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The yield rose four basis points on the week. The price of the 1.75 percent security due in May 2023 slid 26/32, or $8.13 per $1,000 face amount, to 96 7/32.
Thirty-year (USGG30YR) bond yields increased nine basis points to 3.33 percent. They touched 3.34 percent, the highest level since May 31. They rose six basis points on the week.
A measure of volatility in Treasuries climbed yesterday to almost a one-year high.
Hedge-fund managers and other large speculators reversed bets and wagered that 10- and 30-year Treasuries prices will increase, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets on a rise, on 10-year notes outnumbered short positions by 19,684 contracts on the Chicago Board of Trade in the week ended June 4. Last week, traders were net-short 35,505 contracts.
On 30-year bonds, longs outnumbered short positions by 2,369 contracts. Last week, traders were net-short 27,251 contracts.
Payrolls swelled by 175,000 jobs after a revised 149,000 increase in April that was smaller than first estimated. The median forecast in a Bloomberg survey called for a gain of 163,000. The unemployment rate rose from 7.5 percent, the lowest since December 2008, as more people entered the labor force.
The economy added an average of 179,000 positions a month to nonfarm payrolls in 2011 and 2012, according to Labor Department data.
“The number was right in line,” said William Larkin, a fixed-income portfolio manager who helps oversee $500 million at Cabot Money Management Inc., from Salem, Massachusetts. “The market was expecting a restraining growth number.”
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index was at 81.53 today, after climbing to 84.75 yesterday, the highest since June 2012. It has averaged 62.5 in the past 12 months.
Trading volume handled by ICAP Plc, the largest inter-dealer broker of U.S. government debt dropped 3.78 percent to $463.3 billion, from $481.6 billion yesterday. Volume surged to $662 billion on May 22, the highest level in data going back to 2004, according to ICAP. The average daily volume this year is $306.84 billion.
Treasuries have lost 1.7 percent since the end of April, according to Bank of America Merrill Lynch indexes, amid speculation the Fed will slow the pace of its asset purchases. The U.S. central bank, which next meets June 18-19, is buying $45 billion of Treasuries and $40 billion of mortgage-backed securities each month to hold down borrowing costs.
Fed Chairman Ben S. Bernanke told Congress May 22 policy makers could cut the pace of its purchases if they see signs of sustained improvement in growth. He also said tightening policy too soon would endanger the recovery.
The central bank will pare its purchases to $35 billion of Treasuries and $30 billion of mortgage bonds at the Oct. 29-30 meeting of the Federal Open Market Committee, according to the median estimate in a survey of 59 economists this week. In a similar survey before the Fed’s April 30-May 1 meeting, economists expected the Fed to cut total purchases to $50 billion in the fourth quarter.
Bill Gross, manager of the world’s biggest bond fund, said the Fed is unlikely to reduce its asset purchases after the unemployment rate climbed from a four-year low and the Labor Department report showed hourly earnings were little changed at $23.89 in May from the previous month.
“I don’t think today’s report says anything about tapering at all,” Gross, co-founder and co-chief investment officer of Pacific Investment Management Co., said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Mike McKee. Bernanke “won’t taper. But I think ultimately in order to get a more normal economy, the Fed has got to move interest rates up to more normal levels.”
The Fed has held its benchmark interest-rate target for overnight lending between banks in a range of zero to 0.25 percent since 2008 to support the economy. Bernanke has said he’ll keep it at virtually zero until unemployment falls to 6.5 percent while inflation is projected at no more than 2.5 percent. The consumer price index increased 1.1 percent in April from a year earlier, the Labor Department reported on May 16.
Treasuries due in a decade or more are at almost the cheapest level since July 2011 relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on U.S. debt were 50 basis points higher than those in an index of other sovereign debt yesterday. Yields climbed to 60 basis points in the two trading days ending June 3, the cheapest in almost two years.
“The U.S. is the best house in the neighborhood, and a lot of people are going to continue to buy U.S. obligations,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston.
The Treasury 10-year yield will end the year at 2.19 percent, according to the median forecast of economists and strategists in a Bloomberg News survey. That would be the highest year-end yield since 2010, when it was 3.29 percent. The yield was 1.76 percent at the end of last year and 1.88 percent at the close of 2011.
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