BLBG: Treasuries Snap Rally as Job Gain Would Mark ‘Turning Point’
By Wes Goodman
Feb. 5 (Bloomberg) -- Treasuries snapped their biggest advance in three weeks before a government report that economists said will show the U.S. added the most jobs last month since December 2007.
Benchmark 10-year notes headed for their first weekly loss this year on speculation today’s report will confirm the U.S. economic recovery from last year’s recession is strong enough to send yields higher. Payrolls rose by 15,000, after falling by 85,000 in December, according to the median estimate of economists surveyed by Bloomberg News.
“Anything above zero is going to weaken the market,” said Marc Fovinci, head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon, which has $2.5 billion in assets. “It’ll be a turning point.”
The 10-year note yielded 3.61 percent as of 6:31 a.m. in London, according to data compiled by Bloomberg. The 3.375 percent security due November 2019 traded at 98 2/32. The yield rose three basis points this week.
Ten-year rates will increase to 4.14 percent by the end of the year, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.
A turning point would mark an end to a rally that sent Treasuries up 1.65 percent this year, based on indexes compiled by Bank of America Corp.’s Merrill Lynch unit. The return beat the U.K., Japan and Germany, the indexes show.
Jobless Rate
The unemployment rate may have held at 10 percent in December for a third month, near a 26-year high, a separate Bloomberg survey showed. Companies such as Cisco Systems Inc., which is based in San Jose, California, and General Electric Co. in Fairfield, Connecticut, plan to increase staff.
Ferguson Wellman’s Fovinci said he is buying corporate bonds including those of Cisco.
Standard Chartered Plc, the U.K. bank that gains almost all its profit in emerging markets, forecasts the U.S. will add 50,000 jobs. The figure “should boost” Treasury yields, it said in a report today by analysts including Alex Sienaert in Singapore.
White House economic adviser Lawrence Summers expressed confidence U.S. employment will grow as the economic recovery strengthens, in an interview to be broadcast on Bloomberg Television’s “Conversations with Judy Woodruff” at 6 p.m. New York time today.
Tough for Fed
The 10 percent jobless rate will make it tough for the Federal Reserve to raise interest rates from a record low, economists said. The Fed won’t increase its target for overnight bank lending until the second half of 2010, Bloomberg News surveys show.
The difference between U.S. two- and 10-year yields was 2.80 percentage points after reaching a record 2.90 percentage points on Jan. 11. Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by costs in the economy and the size of the government’s debt.
Yields indicate investors are adding to bets inflation will quicken as the U.S. economy strengthens.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened to 2.35 percentage points from 1.11 percentage points a year ago.
Dollar Gains
The dollar rose to its highest level in more than eight months against the euro amid concern widening deficits will hamper Europe’s economic recovery.
The U.S. currency traded at $1.3719 per euro from $1.3723 yesterday in New York, after earlier climbing to $1.3669, the strongest level since May 20.
Treasuries rallied yesterday as stocks slumped around the world on concern some European countries face difficulty financing their deficits. Ten-year yields fell 10 basis points, the most since Jan. 12. Investors shunned the debt of European Union nations with the largest deficits, led by Portuguese bonds.
MSCI’s Asia Pacific Index of shares slid for a second day today, losing 2.5 percent.
“Cash from equities is going into the bond market,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s biggest lender. “There is still a flight to quality.”
Greece’s debt has tumbled in the past two months, pushing the yield on its 10-year security above 7 percent on Jan. 28 to the highest level since 1999.
Default Swaps
The cost of hedging against Treasury losses using credit- default swaps surged yesterday as the U.S. prepared to sell a record-matching $40 billion in three-year notes, $25 billion of 10-year debt and $16 billion in 30-year bonds next week.
President Barack Obama has increased the U.S. marketable debt to a record $7.27 trillion as he tries to sustain the economic recovery.
Swaps on U.S. government debt in euros for five years increased to 57.4 basis points from 46.7 basis points, the biggest increase in a year. That means it costs 57,400 euros ($78,700) a year to protect 10 million euros of debt. Credit- default swaps are contracts designed to protect against or speculate on default.
Moody’s Investors Service said on Feb. 2 that the U.S.’s Aaa debt rating “could come under downward pressure,” unless the government cuts the budget deficit.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
