Treasury yields rose to the highest level in almost two years after a better-than-forecast employment report stoked speculation the Federal Reserve will begin to reduce the size of its asset purchases.
Benchmark 10-year note yields rose the most since October 2011 as the economy added 195,000 jobs in June, compared with the median forecast of 165,000 in a Bloomberg News survey, while the unemployment rate remained at 7.6 percent in May, as forecast. Fed Chairman Ben S. Bernanke said policy makers may “moderate” their asset-purchase program later this year and may end it mid-2014 if economic growth meets their forecasts. European Central Bank President Mario Draghi pledged yesterday to keep interest rates at a record low for an “extended period.”
“Expectations for a September taper are being completely priced in,” Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Fed. “The market’s expecting a smaller balance sheet going forward.”
The 10-year note yield increased 18 basis points, or 0.18 percentage point, to 2.68 percent at 9:02 a.m. in New York, according to Bloomberg Bond Trader prices, after gaining as much as 19 basis points. The yield touched 2.69 percent, the highest since Aug. 2, 2011. The U.S. bond market was closed yesterday for a public holiday.
Treasuries in May and June lost 3.2 percent, their worst two-month performance since the first two months of 2009 when they lost 3.6 percent, Bank of America Merrill Lynch indexes show. U.S. government securities declined 2.5 percent in the first half of the year, their worst start since 2009 when they dropped 4.5 percent, the indexes show.
Treasury 10-year notes declined on May 3 for the first time in three days, pushing yields up 11 basis points to 1.74 percent, when the Labor Department’s April report showed payroll gains of 165,000 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.
An improving economy is dimming the lure of bonds as a haven. The Conference Board’s Consumer Confidence index rose in June to 81.4, exceeding all forecasts in a Bloomberg survey and the highest since January 2008, the New York-based private research group said June 25. Home prices have increased 12 percent since April 2012, according to the S&P/Case-Shiller Composite index.
“It’s a good number -- it doesn’t hurt the tapering camp,” Sean Murphy, a trader at primary dealer Societe Generale SA in New York, said of the payrolls. “I’m not sure if that brings us closer to tapering for September, but it just seems like the market is going to find a footing down here. It will settle at 2.7, 2.75 percent.”
The central bank has been buying $85 billion in bonds monthly, a policy known as quantitative easing, to cap borrowing costs and stimulate the economy.
“The labor market has continued to improve,” Bernanke said at his June 19 press conference. “Job gains, along with the strengthening housing market, have in turn contributed to increases in consumer confidence and supported household spending.”
The economy has added an average of 189,000 jobs this year through May, the fastest pace since 2005 when it created 207,000 positions per month, Labor Department data show. The unemployment rate fell to 7.6 percent in May, down from 8.1 percent in August. The rate for June may fall to 7.5 percent, according to the average estimate of economists surveyed by Bloomberg.
U.S. gross domestic product expanded at a revised 1.8 percent annualized rate from January through March, down from a prior estimate of 2.4 percent, the Commerce Department said June 26. The economy will grow 1.9 percent for 2013, according to the median forecast of 86 economists in a Bloomberg News survey in June, down from last year’s 2.2 percent increase.
A measure of demand at the U.S. Treasury Department’s debt auctions has fallen this year to the lowest level since 2009 as a drop in bond prices generates the biggest losses on government securities in four years.
Investors bid $2.94 for each $1 of the $1.077 billion of notes and bonds sold by the Treasury this year, compared with a record high $3.15 of bids last year. It’s the first decline in demand at the auctions since 2008, when the U.S. government increased note and bond offerings 59 percent to $922 billion as the recession and the financial crisis deepened.
“July will not be the same type of month” as June, Jeffrey Gundlach, chief investment officer of Los Angeles-based DoubleLine, said in a June 27 webcast for investors. “There are profits to be made in the bond market between now and the end of the year.”
Ten-year Treasury yields may fall by 25 basis points, Bill Gross, manager of the Pimco Total Return fund, the world’s biggest bond fund, said in a Bloomberg Radio interview with Tom Keene on June 27.
Yields and spreads over Treasuries were too low two months ago and “the Fed tilted over-risked investors to one side of an overloaded and over-levered boat,” Gross said in his monthly investment outlook posted on the Newport Beach, California-based firm’s website on June 27. “Stay calm and don’t panic.”