BLBG:Treasuries Fail to Recoup Loss as Economists Predict Job Gains
Treasuries failed to rebound from a loss as economists said a government report today will show employment growth quickened in June and is poised to improve in the second half of the year.
Demand for higher-yielding assets buoyed company bonds and stocks over Treasuries after ADP Employer Services said yesterday that U.S. companies hired more workers last month than economists predicted. Deutsche Bank AG said the data prompted it to increase its forecast for today’s payrolls report. An index of U.S. corporate bonds yielded 2.45 percentage points more than Treasuries, the least in a month.
“We reduced longer-term bonds a little,” said Hiromasa Nakamura, who helps oversee the equivalent of $36.9 billion as a senior investor in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Risk aversion is receding.” Nakamura said that Mizuho last week sold some of its longest maturities, those most vulnerable to rising yields.
U.S. 10-year rates were little changed at 3.15 percent as of 12:30 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 traded at 99 25/32. The rate increased three basis points yesterday.
Japan’s 10-year notes yielded 1.175 percent after reaching 1.18 percent yesterday, the highest in two months.
The extra yield investors demand to own Japanese 30-year debt instead of two-year notes widened to 1.94 percentage points yesterday, the most since May 5, after Prime Minister Naoto Kan said this week that a “considerable” amount of bonds will be needed to pay for rebuilding from the March earthquake and tsunami.
Payrolls Increase
U.S. employers added 105,000 jobs in June after an increase of 54,000 in May, according to the median forecast of economists surveyed by Bloomberg before the Labor Department report. The unemployment rate held at 9.1 percent, another survey projected.
The MSCI Asia Pacific Index of shares rose 0.8 percent, after the Standard & Poor’s 500 Index advanced 1.1 percent in New York.
Companies surveyed by ADP added 157,000 positions in June, following a 36,000 gain the prior month, it said yesterday. Deutsche Bank economists led by Joseph A. LaVorgna in New York raised their forecast for today’s jobs gain to 175,000 from 100,000. Unemployment will drop to 9 percent, Deutsche Bank, one of the 20 primary dealers authorized to trade directly with the Federal Reserve, said in a report yesterday.
The 10-year yield will rise to 3.5 percent by year-end, Deutsche Bank forecast.
Stocks Versus Bonds
The difference between yields on five-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 2.15 percentage points, the most in seven weeks.
Treasuries have handed investors a loss of 0.46 percent in the past month, based on Bank of America Merrill Lynch data. Thirty-year securities, those most vulnerable to inflation, dropped 1.35 percent. U.S. corporate bonds fell 0.33 percent, the indexes show.
The MSCI All Country World Index of stocks had a total return of 3.93 percent since June 8, according to data compiled by Bloomberg.
Investors should favor stocks over bonds, said Sungjin Park, chief investment officer for the fixed income division at Samsung Asset Management Co., South Korea’s largest private debt investor.
The Fed will hold interest rates at current levels, limiting movement in Treasuries, he said.
Low Volatility
“That will keep volatility in the fixed-income market low but it will help the equity market,” said Park, who oversees the equivalent of $58.5 billion in debt.
The Merrill Option Volatility Estimate, which gauges price swings in the Treasury market, was 90.40, versus the five-year average of 107.92.
The central bank has held its target for overnight bank lending in a range of zero to 0.25 percent since 2008. It completed a $600 billion bond purchase program in June.
Investors should bet the spread between five- and 30-year yields will widen as President Barack Obama tries to get Congress to lift the federal borrowing limit, Barclays Capital Inc., another primary dealer, said in a report today. The Treasury has said it has until Aug. 2 before its ability to pay the debt expires.
If there is no agreement by then, government spending will have to be cut, Ajay Rajadhyaksha, the head of U.S. fixed income and securitized products strategy, wrote in the report. Investors will reduce expectations for the Fed to raise rates, supporting note, while uncertainty over the U.S. fiscal situation will boost long-term yields, the report said.
Long bonds probably won’t gain much until the longer-term issue of funding Medicare and Social Security is resolved, the report said.
Thirty-year bonds yielded 2.63 percentage points more than five-year notes, versus the five-year average of 1.50 percentage points.
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
