Treasury yields show inflation expectations fell to the lowest level in 10 months before a report tomorrow economists forecast will indicate wage gains held in check in May. The gap between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, reached the least since July. Ten-year notes yielded 1 percent after accounting for consumer prices. The real yield was negative as recently as March. A report tomorrow will show U.S. employers added as many jobs in May as they did a month earlier, according to a Bloomberg survey of economists. “The rise in Treasury yields has been due more to the rise in the real rate and not so much inflation expectations,� said Piet Lammens, head of research at KBC Bank NV in Brussels. “Tomorrow’s payrolls will be enormously important. If they disappoint it means that growth is not so strong and would mean the Federal Reserve might take more time before starting the reduction of their bond purchases.� Benchmark 10-year yields were little changed at 2.09 percent as of 10:05 a.m. London time, according to Bloomberg Bond Trader data. The 1.75 percent note maturing in May 2023 was priced at 96 31/32. The so-called TIPS spread narrowed to 2.14 percentage points today, the smallest since July. It was at 2.73 percentage points in September, which was the widest since May 2006. It has averaged 2.21 percentage points over the past decade. Bond Losses Treasuries have fallen about 1 percent in 2013, according to Bank of America Merrill Lynch indexes. TIPS plunged 4.2 percent. If the losses are maintained for the rest of the year it would be their worst year since the government began selling the securities in 1997, according to the data. “The real yield is becoming more attractive,� said Yoshiyuki Suzuki, the head of the fixed-income department in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $57.5 billion of assets. “Inflation expectations are coming down.� Fukoku bought Treasuries last week for the first time in more than a year, he said. A U.S. Labor Department report tomorrow will show that employment rose by 165,000 in May, based on the median estimate of economists in a Bloomberg News survey. That’s the same as the gain in April. A separate Bloomberg survey of analysts shows hourly earnings increased 2.1 percent from a year earlier, versus 1.9 percent in April. Claims Fall The Labor Department’s weekly report on initial claims for jobless insurance today will show applications fell to 345,000 from 354,000, based on Bloomberg surveys. The average over the past year is 365,900. Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 83.6 yesterday, the highest level since June 2012. It has averaged 62.5 in the past year. Trading volumes in Treasuries have been on the rise, with the amount changing hands through ICAP Plc, the largest inter-dealer broker of U.S. government debt, averaging $387 billion a day since the start of May. That’s up from an average of $280.6 billion in the first four months of the year. Volume yesterday rose 1.9 percent to $370 billion from $363 billion the day before and compares with the $662 billion reached on May 22, the most in data going back to 2004. Auction Schedule The Treasury Department is due to announce the size of 3-, 10- and 30-year auctions scheduled for sale over three days starting June 11. It will sell $32 billion of 3-year debt, $21 billion of 10-year notes and $13 billion of 30-year securities, according to Stone & McCarthy Research Associates, an economic advisory company in Princeton, New Jersey. The government sells this combination of debt every month. Treasuries snapped yesterday’s rally as traders weighed whether the U.S. economy is strong enough to lead the Fed to reduce its bond purchases this year. The central bank buys $85 billion of government and mortgage-backed securities each month, its policy known as quantitative easing, to support the economy by putting downward pressure on borrowing costs. “People are a little bit panicked about rates going up and the Fed ending quantitative easing,� said Ali Jalai, a Treasuries trader in Singapore at Scotiabank, a unit of Canada’s Bank of Nova Scotia (BNS), one of the 21 primary dealers that trade directly with the Fed. To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

Source