Treasuries fall a third day as US adds more jobs than forecast

March 9, 2012 08:19 AM

March 9 (Bloomberg) -- Treasuries fell for a third day as U.S. payrolls increased by more than 200,000 for the third straight month, adding to speculation the Federal Reserve will avoid more monetary stimulus as the recovery builds momentum.

Yields on benchmark 10-year notes reached the highest in a week as demand for the relative safety of U.S. debt was also damped after the Greek government said it reached its target in the biggest sovereign restructuring in history. Interest-rate swap spreads indicate increasing demand for yields higher than those on Treasuries.

“The data definitely shows strengthening in the economy, and three straight months of very solid job numbers shows that there is some consistency, which weighs on Treasuries,” said Carl Lantz, head of interest-rate strategy in New York at Credit Suisse AG, one of 21 primary dealers that trade with the Fed. “The market will need more to break us out of the range we’ve been in for several months as we still have a long way to go.”

Yields on 10-year notes rose four basis points, or 0.04 percentage point, to 2.05 percent at 1:39 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2022 declined 10/32, or $3.13 per $1,000 face amount, to 99 17/32.

The 10-year yield reached as high as 2.06 percent, the most since March 1. Ten-year yields are eight basis points higher this week. They reached a record low of 1.67 percent in September.

Employment Growth

The 227,000 increase in payrolls followed a revised 284,000 gain in January that was bigger than first estimated, Labor Department figures showed today in Washington. Job growth over the last six months was the strongest since 2006. The median projection of economists in a Bloomberg News survey called for a 210,000 rise in February employment.

The difference between the two-year swap rate and the yield on U.S. debt of a similar maturity narrowed to 24 basis points today, the lowest in almost seven months.

U.S. government bonds have lost 0.5 percent this year, while corporate debt has returned 3.2 percent, according to Bank of America Merrill Lynch indexes.

While the economy has added the most jobs in a three-month period since March-May 2010, when the government added temporary workers to carry out the decennial census survey, the 10-year note yield has been stuck between 1.79 percent and 2.09 percent this year amid Europe’s sovereign-debt crisis and the Fed’s policy of keeping borrowing rates at record lows to spur growth.

“Any dip in yields and buyers flock back to Treasuries,” said Suvrat Prakash, an interest-rate strategist in New York at primary dealer BNP Paribas SA. “If the events of this week can’t take us out of the range, it’s unclear what will, and it underscores how strong the demand for Treasuries has been.”

‘Turn the Page’

Greece said today it has a 95.7 percent participation rate among investors after it received approval to activate so-called collective action clauses.

The debt swap is the latest in a series of efforts by policy makers, beginning with an almost $1 trillion aid package from European Union members in May 2010, intended to give Greece breathing room to resolve its structural budget problems. Since then, the debt crisis has widened, engulfing Ireland, Portugal, Spain and Italy.

“You want to turn the page on these guys, but it’s unbelievable,” said Sean Murphy, a trader at Societe General SA in New York, a primary dealer. “You can’t believe it’s the end of the problems for Europe.”

Auctioning $66 Billion

The U.S. government will sell $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds next week. The auctions will take place over three days starting March 12.

“Eventually the siren song of a steeper yield curve and better compensation for duration will pull people out the curve,” said William O’Donnell, head U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, a primary dealer. “I wouldn’t be surprised to see very good auctions related to that next week if we can hold these higher levels.”

Ten-year yields climbed as much as 13 basis points on Feb. 3, the biggest intraday jump since Nov. 10, as January’s unemployment rate unexpectedly fell and payrolls grew more than forecast. Employers added 243,000 jobs, compared with a Bloomberg forecast for a gain of 140,000, and the jobless rate declined to 8.3 percent, the lowest level since February 2009.

Fed Speculation

The Fed’s Open Market Committee, which sets interest-rate policy, meets March 13 amid investor speculation that improvements in economic data have reduced the likelihood it will initiate a third round of asset purchases under quantitative easing.

Fed Chairman Ben S. Bernanke said on Jan. 25, after the FOMC’s last meeting, that policy makers were considering additional asset purchases to boost growth. The central bank also extended a pledge to keep the benchmark interest rate at almost zero through at least late 2014.

Policy makers were “prepared to provide further monetary accommodation if employment is not making sufficient progress towards our assessment of its maximum level, or if inflation shows signs of moving further below its mandate-consistent rate,” Bernanke said at a news conference. Bond buying is “an option that’s certainly on the table,” he said.

In congressional testimony last week, Bernanke failed to indicate that the central bank would boost stimulus. The Commerce Department on Feb. 29 raised its estimate for U.S. economic growth for the fourth quarter to 3 percent, from 2.8 percent, and the Conference Board’s gauge of confidence among American consumers climbed for February the highest in a year.

The Fed bought $2.3 trillion of bonds in two quantitative- easing rounds from December 2008 until June 2011 to spur the economy. In September it announced it would buy $400 billion of longer-term U.S. securities through June while selling an equal amount of shorter-term debt in its holdings to lower borrowing costs. The central bank’s target rate for overnight bank lending has been zero to 0.25 percent since December 2008.

Bloomberg News

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