Treasuries dropped for a second day before a government report on Feb. 7 that’s forecast to show nonfarm payrolls increased in January, boosting the case for the Federal Reserve to keep reducing its bond purchase program.
Ten-year yields climbed from almost a three-month low, extending the advance after the Institute for Supply Management’s index of U.S. service industries, the biggest part of the economy, rose more than forecast. Philadelphia Fed Bank President Charles Plosser said he expects economic growth and a lower jobless rate to warrant faster bond-purchase tapering. The Treasury will auction $70 billion in notes and bonds next week.
“The big kahuna is Friday’s number,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. The ISM report “was a very good piece of data. Whether we’re going back into a slump -- I don’t think so.”
Ten-year yields increased four basis points, or 0.04 percentage point, to 2.67 percent at 5 p.m. in New York, Bloomberg Bond Trader data show, after falling three basis points earlier to 2.60 percent. The yields touched 2.57 percent Feb. 3, the least since Nov. 1. The price of the 2.75 percent security maturing in November 2023 dropped 10/32, or $3.13 per $1,000 face amount, to 100 22/32.
Thirty-year bond yields rose five basis points to 3.65 percent and touched 3.66 percent, the highest level since Jan. 30. They reached 3.52 percent Feb. 3, the lowest since July 5.
The Bloomberg U.S. Treasury Bond Index (BUSY) has gained 1.94 percent this year as tumbling emerging-market currencies and signs of slowing economic growth have boosted haven demand.
Treasury trading volume at ICAP, the largest interdealer broker of U.S. government debt, rose 9.5 percent to $401 billion, above the 2014 average of $334 billion. It reached $494 billion on Jan. 29, the highest level since June 24.
The Treasury said it will sell notes and bonds next week on three consecutive days beginning Feb. 11: $30 billion in three-year debt, $24 billion in 10-year securities and $16 billion in 30-year bonds.
“We’ll see higher yields as we creep into next week,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed.
A Labor Department report this week will show the world’s biggest economy added 183,000 jobs last month, according to a Bloomberg survey of analysts, versus a lower-than-forecast 74,000 in December and an average of 182,170 last year.
“The market is positioning itself ahead of the jobs report,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “They are going to oscillate around these current levels until we get to Friday,” he said, referring to 10-year note yields.
Plosser, who votes on Fed policy this year, said he expects the economy to expand 3 percent in 2014 as the jobless rate falls to 6.2 percent by year-end. Gross domestic product grew at a 3.2 percent pace in the fourth quarter. The jobless rate was at a five-year low of 6.7 percent in December.
“My preference is to scale back our purchase program at a faster pace to reflect the strengthening economy,” Plosser said today in a speech in Rochester, New York.
The Fed said Jan. 29 it would further trim its monthly bond purchases amid optimism that U.S. economic growth is improving. It cut the buying to $65 billion, from $75 billion, in its second $10-billion reduction in as many meetings.
The central bank purchased $968 million today of Treasury Inflation Protected Securities due from February 2040 to February 2043 as part of the program.
Ten-year note yields will climb to 3.42 percent by year-end, according to a Bloomberg survey of economists and analysts with the most recent forecasts given the heaviest weightings.
Service-industry growth accelerated in January, after expanding at the end of last year at the slowest pace since July 2012, data showed today. The ISM’s non-manufacturing index rose to 54, above the 53.7 forecast in a Bloomberg News survey of economists. It was at 53 in December. Readings greater than 50 signal expansion.
Ten-year yields fell to their lowest level of the day as Roseland, New Jersey-based ADP Research Institute reported companies in the U.S. boosted payrolls by 175,000 in January. That trailed the median projection of 40 economists surveyed by Bloomberg for an advance of 185,000.
There’s “no crisis going on today,” said Edmonds of Cantor Fitzgerald. “If we get even slightly weaker-than-expected news, we will see a grind higher in yields.”
Bonds beat stocks last month for the first time since August as fixed-income securities worldwide enjoyed their best start to a year since 2008. Argentina led a tumble in emerging market currencies, while manufacturing in China slid to a six-month low.
Money-market indicators in developed nations show no signs the turmoil in emerging markets triggered any strain in short-term funding conditions.
The dollar Libor-OIS spread, a gauge of banks’ reluctance to lend, averaged 15.2 basis points so far this year, nearly matching its average for all of 2013. This gap between the three-month London interbank offered rate and the overnight index swap rate surged to a record 364 basis points in October 2008, following the collapse a month earlier of Lehman Brothers Holdings Inc.
The difference between the U.S. two-year interest rate swap rate and the comparable-maturity Treasury note yield, known as the swap spread, is at 12.5 basis points, compared to 10.5 basis points at the start of the year. The spread, viewed as an indicator of investors’ perception of U.S. banking sector credit risk, reached in October 2008 a record 167.3 basis points.
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