Treasuries rally as slow job growth curbs bets on more tapering

Treasuries rose after a government report showed the U.S. added fewer jobs than forecast in December, curbing bets the Federal Reserve will further reduce quantitative bond purchases later this month.

U.S. yields dropped as the economy added 74,000 jobs last month, less than the median forecast of 197,000 in a Bloomberg News survey of 90 economists. The unemployment rate fell to 6.7%, the lowest since October 2008. Policy makers at the Fed, which reduced its monthly bond purchases, known as quantitative easing, to $75 billion this month from the $85 billion a month it bought throughout 2013, meet Jan. 28-29.

“The Fed has anticipated a lot of growth and had to reverse themselves and put back more QE, which is why we’re in QE3,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., said before the report.

The benchmark 10-year (CBOT:ZNH14) yield decreased six basis points or 0.06 percentage point, to 2.90% at 8:31 in New York, Bloomberg Bond Trader data showed. The 2.75% note due in November 2023 added 5/8, or $6.25 per $1,000 face amount, to 98 25/32. Thirty-year bond yields fell five basis points to 3.83 percent.

Treasuries have gained 0.3% this month, according to the Bloomberg US Treasury Bond Index. They lost 2.7% during the past 12 months.

Market Reaction

Treasury 10-year note yields fell to a three-month low of 2.51% on Oct. 22 after a report showed payrolls climbed less than projected in September, indicating the U.S. economy had little momentum leading up to the federal government shutdown. Payrolls grew by 148,000 in September versus the median forecast for a 180,000 advance in a Bloomberg News survey.

Fed officials will gather Jan. 28-29 for the next policy meeting.

“A majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue,” the record of the Federal Open Market Committee’s Dec. 17-18 meeting showed. Participants also were “concerned about the marginal cost of additional asset purchases arising from risks to financial stability” citing the potential for “excessive risk-taking in the financial sector.”

Fed Bank of Minneapolis President Narayana Kocherlakota, who votes on monetary policy this year, said the central bank could achieve its goals of full employment and 2% inflation sooner by stepping up stimulus.

Fed President

“By easing monetary policy relative to its current stance, the FOMC could facilitate a more rapid fall in unemployment and more rapid return to 2% inflation,” Kocherlakota said yesterday in the text of prepared remarks given in Minneapolis.

Fed Bank of Boston President Eric Rosengren, who doesn’t vote on policy this year, said Jan. 7 the central bank should cut stimulus “only very gradually.”

Treasuries gained yesterday as rising yields helped attract bidders at a $13 billion 30-year bond auction. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.57, the highest since October at the monthly sales.

The sale of 10-year notes on Jan. 8 drew the highest yield in 2 1/2 years, while the auction of three-year notes the previous day had the lowest demand since October.

Treasury trading volume at ICAP Plc, the largest inter- dealer broker of U.S. government debt, was $376.1 billion yesterday, more than the 2013 average of $308.4 billion.

Volatility rose this week to the highest level in a month. Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries was 73.74 yesterday, after climbing to 75.28 on Jan. 8, the most since Dec. 5.

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