BLBG: U.S. 2-Year Notes Drop Most Since August as Jobless Rate Falls
By Daniel Kruger and Cordell Eddings
Dec. 4 (Bloomberg) -- Treasury two-year notes fell the most since August after the U.S. economy lost fewer jobs than forecast last month, signaling the labor market is emerging from the worst employment slump in the post-World War II era.
Two-year note yields surged as much as 14 basis points to 0.86 percent as the Labor Department said employers cut 11,000 jobs last month, less than the most optimistic forecast among economists surveyed by Bloomberg News. The unemployment rate fell to 10 percent from a 26-year high of 10.2 percent in October.
“It’s less bad than anyone expected,” said Richard Schlanger, who helps invest $13 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “People are going to start pricing in Fed tightening and move up their time horizons if this trend continues.”
The yield on the two-year note rose 14 basis points, or 0.14 percentage point, to 0.86 percent at 10:50 a.m. in New York, according to BGCantor Market Data. That’s the largest gain in yield since Aug. 7. The 0.75 percent security maturing in November 2011 fell 8/32, or $2.50 per $1,000 face amount, to 99 25/32.
“We’ve been warning people that the Treasury market had gotten ahead of itself, given the extent of the recent rally, and now the market is selling off,” said Ajay Rajadhyaksha, head of U.S. fixed-income strategy in New York at Barclays Plc, one of the 18 primary dealers that trade with the Federal Reserve.
Increased Wagers
Traders increased wagers that the Federal Reserve will begin lifting its target rate for overnight loans next year after the U.S. government reported a smaller-than-estimated decrease in jobs last month.
Federal-funds futures contracts on the Chicago Board of Trade show a 18 percent probability that the central bank will lift its target rate for overnight bank borrowing to at least 0.5 percent by March, up from 13.1 percent odds yesterday. For a similar increase at the June meeting of the Federal Open Market Committee, the probability rose to 52.9 percent from 43 percent yesterday.
The U.S. dollar rose against the yen. The Standard and Poor’s 500 Index rose 1.5. Gold for immediate delivery dropped 2.4 percent to $1,178.95 an ounce, retreating from a record $1,226.56 reached yesterday.
Payrolls were forecast to decline 125,000, according to the median estimate of 82 economists surveyed by Bloomberg News Estimates ranged from decreases of 30,000 to 180,000. Revision added 159,000 from payroll figures previously reported for October and September. The October reading was revised to show a 111,000 drop in jobs compared with an initially reported 190,000 decline.
‘A Little Skeptically’
The so-called underemployment rate -- which includes part- time workers who’d prefer a full-time position and people who want work but have given up looking -- fell to 17.2 percent from 17.5 percent.
“Most investors have to view this job growth a little skeptically,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “Yesterday we had the ISM non-manufacturing survey which came in under 50 and showed a decline in service employment. Today’s report shows a big increase in service employment. Those two things don’t make sense.”
The Fed on Nov. 4 repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline.
Practice ‘Rethink’
St. Louis Fed Bank President James Bullard said the central bank may need to rethink its usual practice of waiting for unemployment to drop before starting to raise interest rates, according to an interview with Dow Jones Newswires yesterday.
“If a tepid recovery in labor markets is just the new reality,” then policy makers “shouldn’t be saying, ‘Oh, we are just going to keep interest rates where they are,’” Bullard said.
Bullard added that his comments are in the realm of speculation. The idea that jobless recoveries may become the norm is an “issue that has not been raised, and I’m raising it,” he said. Based on the current view, “you’d have to have unemployment ticking down” before there could be a tightening cycle, Bullard was quoted as saying.
The Treasury will auction $40 billion of 3-year notes on Dec. 8, $21 billion of 10-year notes on Dec. 9 and $13 billion of 30-year bonds on Dec. 10. The U.S. will also sell $30 billion in three-month bills and $31 billion in six-month bills.
U.S. government bonds lost 1.8 percent this year after returning 14 percent in 2008, the most this decade, according to indexes compiled by Bank of America Merrill Lynch.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.
