Treasuries snapped yesterday’s steepest loss in a week, as investors and economists said the recovery in the U.S. job market hasn’t gone far enough for the Federal Reserve to consider raising interest rates. Many months of payroll gains are necessary to prompt a Fed move, according to Anthony Crescenzi at Pacific Investment Management Co., which runs the world’s biggest bond fund. A surge in hiring reported by ADP Employer Services yesterday should be viewed “with skepticism,” Goldman Sachs Group Inc., one of the 18 primary dealers that trade directly with the central bank, wrote to clients. “Growth isn’t strong enough to bring down the unemployment rate,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The Fed will be on hold in 2011. It’s time to consider buying on dips.” BNP’s U.S. unit is another primary dealer. Ten-year notes yielded 3.46 percent as of 6:45 a.m. in London, according to data compiled by Bloomberg. The 2.625 percent security maturing in November 2020 traded at a price of 93 3/32. Prices have alternated between gains and losses for two weeks. Short-term Treasuries, among the most sensitive to what the Fed does with its target for overnight loans between banks, are attractive, Fujiki said. Two-year yields of 0.69 percent are 44 basis points more than the upper end of the Fed’s target range of zero to 0.25 percent. The difference has widened from 2010’s low of eight basis points in November. A basis point is 0.01 percentage point. Signs of Recovery Ten-year yields will drop to 3.17 percent and two-year rates will slide to 0.65 percent by March 31, a Bloomberg survey of banks and securities companies shows, with the most recent forecasts given the heaviest weightings. Treasuries tumbled yesterday after the ADP report showed private employers added 297,000 jobs in December, almost three times the amount that economists expected. Labor Department data tomorrow will show the nation added jobs for a third month in December, a Bloomberg News survey of economists shows. The jobless rate will be more than 9 percent for a 20th month, according to the survey. A separate report from the department today will show initial claims for jobless insurance were near a 30-month low, based on the forecasts. Pimco on Fed “Many, many months of strong payroll gains” are necessary to get the Fed to raise rates, Crescenzi, a portfolio manager at Pimco in Newport Beach, California, wrote to clients yesterday. Increased bank lending or rising expectations for inflation would also be needed, the report said. “None of these conditions exist,” Crescenzi wrote. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.42 percentage points yesterday, the most since April. The way ADP compiles its data tends to skew the figures for December, Andrew Tilton, an economist at Goldman Sachs in New York, wrote in his report yesterday. “We view the dramatic improvement shown in the report with skepticism,” he wrote. “Markets may be overly optimistic about the extent to which this will show up in Friday’s report.” The Fed is scheduled to buy $6 billion to $8 billion of notes due from January 2015 to June 2016 today as part of its effort to spur the economy. The Treasury plans to announce the sizes of three-, 10- and 30-year auctions set for next week. Services Growth Signs of growth outside the job market will push Treasury yields higher, Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has the equivalent of $67.1 billion in assets. Service industries, which cover about 90 percent of the U.S. economy, expanded in December at the fastest pace since May 2006, a private report showed yesterday. There are many factors that will push yields higher,’’ Okumoto said. “The economic figures are very good. The supply outlook may weigh on the market.” Ten-year yields will advance to 3.75 percent by the end of March, he said. President Barack Obama has increased the U.S. publicly traded debt to a record $8.75 trillion. Okumoto said he’s trying to buy dollar-denominated corporate bonds being sold this week, betting they will outperform government debt as the economy improves. The limited amount of the securities makes them tough to get, he said. Toyota Motor Corp., the world’s largest automaker, and Warren Buffett’s Berkshire Hathaway Inc. are among the companies that have issued debt this week. Treasuries returned 5.9 percent in 2010, versus 10 percent for company bonds, Bank of America Merrill Lynch indexes show. Fed policy makers said improvements in the economy didn’t meet the threshold for scaling back their plans to purchase $600 billion in bonds, in minutes of their Dec. 14 policy meeting released Jan. 4 in Washington. Thirty-day federal funds futures contracts for delivery in February 2012 yielded 0.565 percent, indicating investors expect the central bank to increase borrowing costs by that month from current levels. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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