BLBG:Treasury Yield at Highest Versus G-7 in 3 Years Before Payrolls
Treasury yields climbed to the highest level in three years relative to those of Group-of-Seven nations before a U.S. government report that economists said will show the jobless rate fell in July.
Ten-year Treasuries yielded 38 basis points more than bonds in an index of their G-7 peers, the biggest difference since May 2010, data compiled by Bloomberg show. U.S. government yields jumped yesterday on speculation the U.S. economy is growing fast enough for the Federal Reserve to begin trimming its bond purchases, known as quantitative easing, as soon as its meeting in September.
“The economic fundamentals have been good,” said Allen Lei, a Treasury trader in Taipei at Hontai Life Insurance Co., which oversees the equivalent of $6.1 billion. “I don’t care whether the Fed tapers QE in September, December or March next year. I just know quantitative easing will end.” Ten-year yields will be 2.75 percent or more by year-end, Lei said.
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.73 percent at 8:46 a.m. in London, according to Bloomberg Bond Trader prices. The 1.75 percent note maturing in May 2023 fell 1/8, or $1.25 per $1,000 face amount, to 91 22/32.
The yield climbed 13 basis points yesterday. While it has climbed from a record low of 1.38 percent set last year, it is still less than the average of 3.55 percent in the past decade.
Yield Forecasts
Treasuries have lost 3.1 percent this year through yesterday, while German bonds dropped 1.3 percent, based on the Bloomberg World Bond Indexes. Stocks in the MSCI All-Country World Index returned 13 percent, including reinvested dividends.
U.S. 10-year yields will be at 2.64 percent by year-end, according to a Bloomberg survey of financial firms with the most recent projections given the heaviest weightings. The U.S. has $11.5 trillion of debt, making it the world’s biggest borrower.
The Fed is buying $85 billion of bonds a month to put downward pressure on interest rates, and policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.
Payrolls increased by 185,000 in July, after rising 195,000 the previous month, according to on a Bloomberg News survey of economists before the Labor Department report at 8:30 a.m. in Washington. The jobless rate fell to 7.5 percent from 7.6 percent, matching the lowest since 2008, based on the responses.
Separate figures today will show gains in incomes, spending and factory orders, according to the surveys.
‘Excess Liquidity’
Reductions in the Fed’s debt-buying program won’t automatically send yields higher, based on what happened in the first two rounds of quantitative easing, according to Akira Takei, head of the international fixed-income department at Mizuho Asset Management Co. in Tokyo.
Ten-year yields declined 1.26 percentage points between the end of the first phase of Fed purchases in March 2010 and the beginning of the second round in November of that year.
Yields slid 1.3 percentage points between the end of the second buying program in June 2011 and the beginning of the Fed’s so-called Operation Twist plan in September the same year.
“The Fed will taper QE not because the economy is booming but because the program has been creating excess liquidity, boosting risk assets too much,” said Takei, who helps oversee the equivalent of $37 billion and whose company’s U.S. affiliate is one of 21 primary dealers that underwrite the U.S. debt. “Ending QE is likely to trigger a correction in risk assets, driving bond yields down.”
Data released since last week on new home sales, durable goods orders, gross domestic product, jobless claims and manufacturing have all pointed to improvement in the economy.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
