BLBG:Treasuries Head for Second Weekly Gain Before U.S. Employment Report Today
Treasuries headed for a second weekly gain on speculation a U.S. employment report today will bolster the Federal Reserve’s view that the economy requires support from record-low interest rates even as it adds jobs.
U.S. government securities returned 0.3 percent this year, compared with a loss of 0.2 percent from German bonds, Bank of America Merrill Lynch indexes show. Yields tumbled this week, sending five-year rates to a record low, after the Fed said on Jan. 25 it will keep the benchmark interest rate near zero until at least late 2014. Inflation will be in check in 2012 and may quicken after that, according to BlackRock Inc., the world’s biggest money manager.
“The rally in Treasuries can keep going for the coming months,” said Hiromasa Nakamura, a senior investor at Mizuho Asset Management Co. in Tokyo, which oversees the equivalent of $43.2 billion and is a unit of Japan’s second-largest publicly traded bank by assets. “U.S. employment conditions are fragile. Inflation will be kept at bay.”
Benchmark U.S. 10-year yields were little changed at 1.82 percent as of 8:38 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security due in November 2021 changed hands at 101 19/32.
The yield has dropped 21 basis points, or 0.21 percentage point, in the past two weeks, with a seven basis-point drop since Jan. 27. It will decline to 1.5 percent by June 30, said Mizuho’s Nakamura, who predicted last year’s Treasuries rally.
Five-Year Record
Five-year notes yielded 0.71 percent, versus the record of 0.6981 percent on Jan. 31.
U.S. employers probably added 140,000 jobs in January, following 200,000 in December, according to a Bloomberg News survey of economists before the Labor Department report today. The unemployment rate will hold at 8.5 percent, a separate survey shows. It has been at that level or higher for 34 months.
German bund yields fell three basis point to 1.82 percent. Japan’s 10-year rate was little changed at 0.95 percent. It was as low as 0.935 percent on Jan. 16, a level not seen since November 2010.
Fed Bank of Chicago President Charles Evans told reporters yesterday that the central bank needs a clear, low-rate commitment or a third round of purchases of Treasuries and mortgage bonds to further stimulate a still struggling economy.
Fed Bank of Dallas President Richard Fisher described policy makers’ forecasts for the central bank interest rate as little more than speculation. “These are not binding commitments,” Fisher said yesterday.
Inflation Goal
Chairman Ben S. Bernanke said on Jan. 25 that he’s considering buying bonds to sustain the expansion, a strategy known as quantitative easing, or QE. The central bank has already purchased $2.3 trillion of Treasury and mortgage-related bonds in two rounds of easing that ended in June. Bernanke yesterday told lawmakers that the Fed wouldn’t sacrifice its inflation goal to boost employment.
Improvement in the economy has yet to increase inflation expectations. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.15 percentage points, compared with the 10-year average of 2.13 percentage points.
“The Fed wants to err on the side of creating a bit more inflation,” said Rick Rieder, chief investment officer for fundamental fixed-income portfolios at BlackRock, which manages $3.51 trillion. “I don’t think it’s a 2012 event. As you get into 2013, 2014, you could see more inflation.”
Economy, Unemployment
The Fed is open to doing more quantitative easing, Rieder said, speaking yesterday in an interview from London.
“If the economy continues to be moderate and unemployment doesn’t improve at a quicker pace, then they could very well do QE,” he said. BlackRock added to its holdings of TIPS due in 10 years and longer a few weeks ago, he said.
The Fed is in the process of replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs, under a program it plans to conclude in June.
The central bank is scheduled to sell as much as $8.75 billion of securities due from May to November of this year today as part of the exchange, according to the New York Fed’s website.
The U.S. is scheduled to sell $72 billion of coupon-bearing securities including 30-year bonds next week.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
