Yields on 10-year Treasuries decline to two-week low on jobs concern

Treasury 10-year note yields dropped to a more than two-week low amid speculation the U.S. employment market is floundering as politicians debate the so-called fiscal cliff, sustaining demand for safer assets.

Benchmark 10-year notes held a two-day advance before a Labor Department report tomorrow that economists said will show U.S. non-farm payrolls rose by 86,000 in November, the smallest gain since June. Treasuries were supported as European Central Bank President Mario Draghi said economic weakness in the region will continue. The Treasury Department will announce today the size of auctions scheduled for next week.

“The primary focus is employment tomorrow and then the fiscal cliff,” said Thomas Simons, a government-debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trades with the Federal Reserve. “After this week, the fiscal cliff resumes its more prominent position. Yields will remain in this range.”

Ten-year yields fell one basis point, or 0.01 percentage point, to 1.58 percent at 10:06 a.m. New York time, according to Bloomberg Bond Trader data. The yield dropped to 1.56 percent, the lowest since Nov. 16. The price of the 1.625 percent note due in November 2022 rose 4/32, or $1.25 per $1,000 face value, to 100 15/32.

The difference between the yields on the two-year note and the 10-year security dropped to 1.34 percentage points, the narrowest since Nov. 16.

‘Rich Levels’

The so-called yield curve typically narrows when investors anticipate a slow recovery because they demand less compensation for the risk that growth will spark inflation.

“We are at rich levels, but the market continues its slow grind higher,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker. “No one wants to make any big bets before something changes.”

The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, widened to 2.7 percent as of Dec. 3, the most recent figure available from data compiled by Bloomberg. The figure is the widest since Nov. 14 and is down from a 2012 high of 2.89 percent on Nov. 1.

The forecast jobs data for tomorrow is fueling speculation the Fed is preparing to announce a new round of bond purchases for 2013 at its next meeting on Dec. 11-12 to spur the economy. Policy makers said on Sept. 13 they will buy bonds until the job market improves “substantially.”

Debt Exchange

Fewer Americans than projected filed applications for unemployment benefits last week as disruptions caused by hurricane Sandy waned, Labor Department figures showed today. Initial claims decreased by 25,000 to 370,000 in the week ended Dec. 1. The median forecast of 52 economists surveyed by Bloomberg called for a drop to 380,000.

Treasuries gained yesterday after President Barack Obama told business executives the global economy remains “soft” and the deadlock in Washington over taxes and spending is holding the U.S. back from leading a strong recovery. The fiscal cliff of $607 billion in tax increases and government spending cuts will start taking effect in early 2013 unless lawmakers act to avert it.

“The fiscal cliff is still driving the bus,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There is a realization that both sides have marked lines and there have been no real negotiations, and this continues to have the market on edge.”

Treasury Auctions

The Fed is exchanging about $45 billion of short-term Treasuries from its holdings for longer-term debt each month under a program scheduled to end by Dec. 31.

The central bank plans to buy as much as $2.25 billion of securities maturing from February 2036 to November 2042 today. It’s also scheduled to purchase as much as $5.25 billion of debt due from December 2018 to November 2020.

The U.S. will sell $32 billion of three-year notes, $21 billion of 10-year securities and $13 billion of 30-year bonds over three days starting Dec. 11, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey.

Treasuries have returned 0.7 percent since the end of October, according to Bank of America Merrill Lynch indexes, compared with a 0.8 percent return for German bunds.

ECB’s Draghi said economic weakness in the euro area will persist into next year before a gradual recovery begins.

“Weak activity is expected to extend into next year,” Draghi said today at a press conference in Frankfurt after policy makers left the benchmark rate at a record low of 0.75 percent. “Later in 2013 economic activity should gradually strengthen,” supported by the central bank’s accommodative monetary policy, Draghi said.

Bloomberg News

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