Job news not that good; Treasuries advance

Treasuries rose with the yield on 10-year notes (CBOT:ZNU14) dropping to the lowest level in almost a week as traders bet the declines after a stronger-than-forecast employment report were overdone as the pace of the recovery remains uneven.

Shorter-maturity Treasuries, which are most sensitive to changes in the Federal Reserve’s short-term interest rate target, underperformed their longer-dated peers before the U.S. sells $27 billion of three-year notes today. The securities traded at the highest yield since April 2011 on speculation the Fed will raise its interest-rate target next year.

“We’ve had a good-sized reaction to the unemployment report on Thursday,’’ said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 22 primary dealers that trade with the Fed. ‘‘There are still willing investors. If you got short after the unemployment report, then you’re under water. People are forced to cover their shorts.’’ A short position is a bet the price of a security will decline.

Benchmark 10-year note yields fell four basis points, or 0.04 percentage point, to 2.58% at 9:34 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5% note due in May 2024 added 10/32, or $3.13 per $1,000 face amount, to 99 11/32.
 

Note Yields
 

Current three-year yields declined two basis points to 0.95%. The three-year securities being sold today yielded 1% in pre-auction trading, after reaching the highest level since the notes sold at 1.28% in April 2011.

The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, dropped yesterday to $169 billion, the least since May 23 when the market had an early close. The daily average volume this year is $330 billion. Volume touched a 2014 high of $606 billion on May 2 and a low of $146 billion on April 21.

Treasury three-year notes (CBOT:ZEU14) lost 0.2% in the month ended yesterday, according to Bank of America Merrill Lynch indexes. Ten-year notes were little changed during the same period, the data show.

Investors are adding to bets the Fed will raise borrowing costs next year after the government reported last week that U.S. employers added 288,000 workers in June, compared with the 215,000 projected by a Bloomberg News survey of economists.
 

Fed Views
 

Goldman Sachs Group Inc. and JPMorgan Chase & Co. are among banks to have brought forward in the past week their estimated dates for the Fed’s first rate increase.

Traders see a 78% chance that officials will raise the key rate by September 2015, fed funds futures contracts show. The central bank has kept the benchmark fed funds rate in a range of zero to 0.25% since December 2008.

‘‘We have a recovering economy and we’re closer to rate hikes, and it’s moving the short end a bit,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “There’s a reach for yield.”

The central bank is scheduled to publish the minutes of its June 17-18 meeting tomorrow.

At the previous sale of three-year notes in June, the bid- to-cover ratio, which gauges demand by comparing the amount bid with the total offered, was 3.41. The average for the past 10 sales was 3.34.

Today’s auction marks the third consecutive time that the U.S. has reduced the size of the monthly sales, cutting the amount in $1 billion steps from $30 billion in April.

The government will sell $21 billion in 10-year securities tomorrow and $13 billion in 30-year debt on July 10.

Japanese investors boosted their holdings of Treasuries by 731.6 billion yen ($7.19 billion) in May, the most since November, according to data released today by the finance ministry and the Bank of Japan.

They purchased a net 1.86 trillion yen of France’s sovereign debt, the most on record dating back to 2005, and sold a net 1.05 trillion yen of German bunds, the data showed.

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