BLBG:Treasuries Head for Weekly Decline on Speculation U.S. Economy Added Jobs
Treasuries headed for a weekly loss before a government report that economists said will show hiring in the U.S. picked up for a second month in December, indicating the labor market strengthened going into 2012.
A rally that drove Treasuries to their best performance last year since 2008 is being interrupted as signs of improvement in the world’s biggest economy curb the flight to safety caused by Europe’s debt crisis. Federal Reserve holdings (FARBTRSE) of Treasuries on behalf of central banks outside the U.S. fell to $2.67 trillion for the week ended Jan. 4, the least since April, Fed data show.
“I expect some improvement in unemployment,” said Masazumi Fukuoka, a senior dealer at the Singapore branch of Mitsubishi UFJ Trust & Banking Corp., a unit of Japan’s largest publicly traded lender. “Fourth-quarter GDP will be strong. That will push up bond yields.”
U.S. 10-year yields (USGG10YR) were little changed at 2 percent at 8:50 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 traded at 100. The yield has climbed 12 basis points, or 0.12 percentage point, this week.
The difference (USYC5Y30) between five- and 30-year yields widened to 2.19 percentage points yesterday, the most in three weeks.
Job Growth
The U.S. economy added 155,000 jobs last month, versus 120,000 in November, according to the median forecast in a Bloomberg News survey of economists before the Labor Department reports today. Unemployment climbed to 8.7 percent from 8.6 percent, a separate survey showed.
The job gains aren’t enough to get Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, to start betting against Treasuries. Nakamura, who helps oversee the equivalent of $42.6 billion at the unit of Japan’s second- largest bank, correctly predicted 2011’s advance.
“The rally will continue,” he said. “The employment situation is the same as last year. Personal income is weakening. Home prices continue to slow. These are all negative for consumer spending.”
Ten-year yields will drop to a record 1.50 percent by Dec. 31, he said. The yield declined to an all-time low of 1.67 percent on Sept. 23.
European Crisis
Stronger employment figures probably won’t be enough to reverse the negative economic influence of the European debt crisis, according to Bank of America Merrill Lynch, one of the 21 primary dealers that trade with the Fed.
“Even a handful of very strong employment numbers would not do much to fill the sheer magnitude of the excess capacity in the U.S. labor market and its concomitant disinflationary pressure,” New York-based John Shin, a currency strategist, and Michelle Meyer, an economist, wrote in a report yesterday.
Treasuries gained after the previous employment report Dec. 2, pushing the 10-year yield down five basis points, even after the jobless rate slid to the lowest level since 2009, because investors focused on Europe instead of the U.S.
As the world’s largest economy shows signs of strengthening, the outlook for Europe has deteriorated. U.S. gross domestic product will grow 2.1 percent in 2012, compared with 1.8 percent in 2011 and 1.25 percent for all Group of 10 nations, Bloomberg surveys of economists show. The European economy will contract 0.2 percent, based on the responses.
Yields on the 10-year bonds of Italy, which has more than $2 trillion of debt, are above the 7 percent level that preceded bailouts for Greece, Ireland and Portugal from the European Union and the International Monetary Fund.
Yield Forecasts
The majority of economists predict Treasury yields will rise this year. Ten-year rates will advance to 2.69 percent by Dec. 31, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.
Treasuries fell yesterday after ADP Employer Services reported that companies added 325,000 workers last month, the most in records going back to 2001, and as the government said initial jobless claims decreased last week.
U.S. government securities have handed investors a 0.5 percent loss in January as of yesterday, after surging 9.8 percent last year, Bank of America data show.
Corporate bonds fell 0.2 percent this month, while Treasury Inflation Protected Securities returned 0.4 percent.
The spread (USGGBE02) between yields on two-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened to 1.65 percentage points yesterday. It was the most in five months and compares with the 10-year average of 1.50 percentage points.
Two-year yields were little changed today at 0.26 percent.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
