Treasuries fell, snapping a three-day gain, as Chinese manufacturing output rose in October and U.S. reports today are forecast to show factories expanded and construction spending increased.
U.S. debt extended losses after a private report showed October jobs gains exceeded forecasts and remained lower as weekly unemployment insurance claims were lower than forecast. Treasuries declined for a third month in October, the longest slide since the last quarter of 2010, according to Bank of America Merrill Lynch indexes. Treasuries are “unlikely” to produce higher returns in the next few years, James W. Paulsen, chief investment strategist at Wells Capital Management Inc. in Minneapolis, wrote in a report.
“Treasuries are off this morning a little bit because of the numbers from China,” Adrian Miller, director of global market strategy at GMP Securities LLC in New York, said in a telephone interview. “I wouldn’t expect you’ll see much movement in Treasuries until we get that jobs report,” he said, referring to tomorrow’s U.S. October employment report.
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 1.71 percent at 8:59 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 fell 6/32, or $1.88 per $1,000 face amount, to 99 7/32.
Trading Activity
Treasury trading volume rebounded yesterday. ICAP Plc, the largest inter-dealer broker of U.S. government debt, said trading totaled $250 after falling to a 10-month low of $82 billion on Oct. 29. The yearly average is $241.8 billion a day in 2012.
Investors in Treasuries reduced bearish bets to the lowest level since June, while increasing neutral positions, according to a survey by JPMorgan Chase & Co. The proportion of net longs was at six percentage points in the week ending yesterday, according to JPMorgan. The levels of bullish and bearish bets were equal the previous week.
The Federal Reserve is swapping its holdings of shorter- term Treasuries with those due in six years to 30 years to put downward pressure on long-term borrowing costs. This month, the central bank will buy about $47 billion of Treasuries and sell about $37 billion, while redeeming about $100 million, according to the Fed Bank of New York’s website.
The central bank plans to buy as much as $2.25 billion of securities due from February 2036 to August 2042 today as part of the program. Today’s purchase was rescheduled from Oct. 30, when it was postponed due to Hurricane Sandy.
Companies added 158,000 workers in October, according to a private report based on payrolls. The increase in employment was higher than forecast, data from the Roseland, New Jersey-based ADP Research Institute showed today. This is the first ADP report derived using a larger sample and new methodology.
The median forecast of 37 economists surveyed by Bloomberg projected a 131,000 advance. Estimates ranged from 80,000 to 170,000. The previous methodology showed a gain of 162,000 jobs in September.
Applications for jobless benefits fell 9,000 to 363,000 in the week ended Oct. 27, the fewest in three weeks, the Labor Department reported today in Washington. Economists forecast 370,000 claims, according to the median estimate in a Bloomberg survey.
“There are signs of improvement in the U.S. economy,” said Michael Quach, a global investment strategist at Smith & Williamson Investment Management Ltd. in London. “Yields will probably rise from here, but I don’t think they will move much higher because the recovery is far from robust.”
Labor Report
The U.S. jobless rate climbed to 7.9 percent in October from 7.8 percent in September, another Bloomberg survey of economists showed before the Labor Department data tomorrow. It will be the last of the monthly employment reports before the Nov. 6 presidential election.
The Institute for Supply Management’s U.S. factory index was at 51 from 51.5 in September, according to a Bloomberg survey before the report is released at 10 a.m. New York time, also indicating expansion. Commerce Department data at the same time will show construction spending rose 0.7 percent in September after a 0.6 percent decrease, based on the surveys.
A Chinese manufacturing gauge based on a survey of purchasing managers climbed to 50.2 in October from 49.8 in September, the National Bureau of Statistics and China Federation of Logistics and Purchasing said in Beijing. Readings above 50 signal expansion. South Korea’s exports unexpectedly increased in October, Statistics Korea said.
Treasuries rose yesterday as trading resumed following the market closure on Oct. 30 for Hurricane Sandy. The storm may reduce output in the world’s largest economy by $25 billion in the fourth quarter, according to Gregory Daco, a U.S. economist at IHS Global Insight. He said that may cut the fourth-quarter pace of growth to a range of 1 percent to 1.5 percent, from the company’s earlier estimate of 1.6 percent.
Treasury yields “should stay low” as Fed stimulus is failing to spur companies to invest in production, Pacific Investment Management Co.’s Bill Gross wrote in a monthly investment outlook published on the company’s website.
“Financial repression and quantitative easing were supposed to be the extraordinary monetary policies that kick started the real economy,” but they haven’t succeeded, wrote Gross, who runs the world’s biggest bond fund.
Financial markets have remained “remarkably calm” even with signs of slower global growth, an uncertain U.S. election and sovereign-debt crisis in the euro area, Paulsen at Wells Capital, wrote in a report the company distributed yesterday.
“In the past this has led to a much more ‘risk-on’ friendly investment climate where stock returns improve significantly,” he said.
The Treasury 10-year yield will rise to 2.04 percent by June 30, according to a Bloomberg survey of economists with the most recent projections given the heaviest weightings. The yield dropped to a record 1.379 percent on July 25.
