Treasuries drop, snap three-day gain, as China factories expand

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.

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