BLBG:Treasuries Drop for Second Day Before Factory-Orders Data
Treasuries fell for a second day before a government report that is forecast to show orders to U.S. factories increased in December, adding to speculation the world’s largest economy is recovering.
Benchmark 10-year yields climbed to the highest level in almost 10 months as separate data showed Chinese services industries grew at the fastest pace since August. The yield difference, or spread, between five- and 30-year Treasuries widened to the most in four months, showing traders expect the economy to pick up as they demand higher rates in case inflation quickens. Orders for durable goods rose the most in three months in December, and payrolls increased, reports showed last week.
“We expect U.S. factory orders will come in as a strong monthly figure after the huge increase in durables,” said Ralf Umlauf, a research analyst at Landesbank Hessen-Thueringen in Frankfurt. “The China services index was quite good which, as well as the U.S. jobs data, puts pressure on the U.S. Treasury market.”
The U.S. 10-year yield climbed two basis points, or 0.02 percentage point, to 2.04 percent, after rising to 2.06 percent at 10:25 a.m. in London, the highest since April 12, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in November 2022 declined 6/32, or $1.88 per $1,000 face amount, to 96 3/8.
Chinese Data
China’s non-manufacturing Purchasing Managers’ Index increased to 56.2 in January from 56.1 in December, according to a report yesterday. A number above 50 indicates expansion.
“The global economy continues to recover,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “That is pushing up yields and equity markets around the world.”
Orders to U.S. factories rose 2.3 percent in December after being unchanged previously, according to the median of 48 analyst forecasts in a Bloomberg survey.
U.S. payrolls increased by 157,000 in January, following a revised 196,000 gain the previous month, the Labor Department said Feb 1. The unemployment rate climbed to 7.9 percent.
Federal Reserve Bank of St. Louis President James Bullard said in a Feb. 1 interview he expects growth in the world’s biggest economy to gain enough momentum to allow the central bank to reduce the pace of bond-buying as early as the middle of the year.
Fed Purchases
Bullard backed the Federal Open Market Committee’s decision last week to keep purchasing securities at the rate of $85 billion a month, the third round of a policy known as quantitative easing. Fed officials have pushed the benchmark interest rate close to zero and expanded central bank assets to more than $3 trillion to spur growth and reduce unemployment.
The Treasury will today release its borrowing estimates for the current quarter and the three months beginning April 1. The department has resorted to “extraordinary measures” to continue funding the government after reaching its statutory debt limit. The House of Representatives voted Jan. 23 to suspend the $16.4 trillion federal debt ceiling until May 19.
Derivatives traders are signaling there’s little chance of a bear market in Treasuries for the next three years.
Demand for insurance against a steep rise in 10-year note yields, the so-called payer skew in options on swaps, has fallen to about its average since 2009, according to Barclays Plc data. The spread between volatility on three-year options that allow investors to pay fixed rates on 10-year interest-rate swaps and those that grant the right to receive fixed rates has narrowed to about 15 basis points from 25 points on June 1.
‘Higher Rates’
“The concern and focus of the Fed is still unemployment,” William O’Donnell, head U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, said in an interview on Jan. 28. “And in the Fed’s eyes it’s not good enough yet, so it’s not at all surprising that people who do see higher rates don’t expect a 1994-like movement” when yields surged as the central bank boosted interest rates.
A Bank of America Merrill Lynch index showed Treasuries handed investors a 1 percent loss last month, the worst start to a year since 2009.
Technical indicators are signaling the increase in yields may be nearing an end.
The 14-day relative strength index for the 10-year Treasury yield was at 71 today, above the level of 70 that suggests it may be about to change direction.
Pimco’s View
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said he is avoiding long-term bonds.
U.S. inflation will be benign in 2013, Pimco’s Gross said in a Feb. 1 interview with Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.” The rate may pick up in 2014 to 2016, he said. Faster inflation “will create an upper drift in long-term yields,” Gross said. “How do we play it? We avoid long-term bonds.”
The Fed’s measure of inflation expectations for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, climbed to 2.89 percent, the most since August 2011. The average over the past decade is 2.75 percent and compares with an annual inflation rate of 1.7 percent as measured by consumer prices.
To contact the reporters on this story: Neal Armstrong in London at narmstrong8@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
