Treasuries fall as U.S. employment data sustain Fed speculation

June 7, 2013 05:05 AM

Treasuries fell after U.S. payrolls increased in May more than forecast even as the jobless rate unexpectedly rose, keeping alive speculation the Federal Reserve may slow its bond-buying under quantitative-easing stimulus.

The drop pared U.S. 10-year notes’ first weekly gain since April. A measure of volatility in Treasuries climbed yesterday to almost a one-year high. The Fed will trim its asset purchases in October by less than previously forecast, economists in a Bloomberg survey projected earlier.

“It may give the Fed pause to taper at the end of the year rather than earlier,” Aaron Kohli, an interest-rate strategist BNP Paribas in New York, one of 21 primary dealers that trade with the Fed. “It was one of those numbers that doesn’t give us enough to push us in any strong direction, and that uncertainty is being reflected in the markets.”

The 10-year note yield increased three basis points, or 0.03 percentage point, to 2.11% at 9:39 a.m. in New York, according to Bloomberg Bond Trader prices. It dropped as much as four basis points. It has lost two basis points this week. Thirty-year bond yields rose four basis points to 3.28%.

Payrolls rose by 175,000 jobs after a revised 149,000 increase in April that was smaller than first estimated, Labor Department figures showed today in Washington. The median forecast in a Bloomberg survey called for a 163,000 gain. The unemployment rate rose to 7.6%, from 7.5%.

“The number was right in line,” said William Larkin, a fixed-income portfolio manager who helps oversee $500 million at Cabot Money Management Inc., from Salem, Massachusetts. “The market was expecting a restraining growth number.”

High Volatility

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 84.75 yesterday, the highest since June 18, 2012. It has averaged 62.5 in the past 12 months.

Treasury 10-year notes dropped on May 3 for the first time in three days, pushing yields up 11 basis points to 1.74%, when the Labor Department’s April report showed payroll gains exceeded the 140,000-job forecast in a Bloomberg survey and the jobless rate unexpectedly fell.

Ten-year notes climbed on April 5, when the government said payrolls added 88,000 jobs in March, trailing a Bloomberg survey forecast for a gain of 190,000.

The economy added an average of 179,000 positions a month to nonfarm payrolls in 2011 and 2012, Labor Department data show. The unemployment rate had stayed above 8% since February 2009 until it broke the trend in September, declining to 7.8%.

Fed Purchases

Treasuries have lost 1% in 2013, according to Bank of America Merrill Lynch indexes, amid speculation the Fed will slow the pace of its asset purchases.

The U.S. central bank is buying $85 billion of government and mortgage-backed securities each month to hold down borrowing costs and encourage economic growth.

It has kept its benchmark interest-rate target for overnight lending between banks in a range of zero to 0.25% since 2008 to support the economy. Fed Chairman Ben S. Bernanke has said he’ll keep the rate at virtually zero until unemployment falls to 6.5% while inflation is projected at no more than 2.5%.

The consumer price index increased 1.1% in April from a year earlier, the Labor Department reported on May 16.

“If we see continued improvement, and we have confidence that is going to be sustained, we could in the next few meetings take a step down in our pace of purchases,” Bernanke told the Joint Economic Committee of Congress on May 22. He also said tightening policy too soon would endanger the recovery.

Purchase Bets

The Fed will pare its asset purchases to $65 billion a month at the Oct. 29-30 meeting of the Federal Open Market Committee, according to the median estimate in the survey of 59 economists this week. In a similar survey before the Fed’s April 30-May 1 meeting, economists expected the Fed to cut purchases to $50 billion in the fourth quarter.

The U.S. economy expanded at a “modest to moderate” pace in 11 of 12 Federal Reserve districts, with broad-based gains ranging from business services to construction and manufacturing, the central bank said on June 5 in its Beige Book business survey.

Policy makers will consider the report at their June 18-19 meeting as they continue a debate on when to start curtailing the pace of bond purchases.

The Treasury 10-year yield will end the year at 2.2%, according to the median forecast of 77 economists and strategists in a Bloomberg News survey. That would be the highest year-end yield since 2010, when it was 3.29%. The yield was 1.76% at the end of last year and 1.88% at the close of 2011.

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