BS: Treasuries Drop as U.S. Economy Adds Jobs, Recovery Strengthens
Treasuries fell for a second day as a report showed the U.S. economy added more jobs than forecast last month, adding to speculation that stimulus from the Federal Reserve is bolstering the economy.
The yield on the 10-year note rose as a report showed the U.S. added 171,000 jobs in October, compared with a forecast of 125,000 and a revised 148,000 gain the previous month. The benchmark security broke a three-day rally yesterday as employment and manufacturing data showed signs of strength.
“There’s improvement in the labor situation, absolutely,” said Richard Schlanger, who helps invest $20 billion in fixed- income securities as vice president at Pioneer Investments in Boston. “We’ve bottomed. We’re on an upward trajectory. The Fed is still going to continue to add liquidity and do more Operation Twist.”
The yield on 10-year notes rose four basis points, or 0.04 percentage point, to 1.77 percent at 8:45 a.m. New York time. The 1.625 percent note due in August 2022 fell 11/32, or $3.44 per $1,000 face amount, to 98 3/4.
Thirty-year bond yields rose five basis points to 2.95 percent.
Jobs Data
The unemployment rate rose to 7.9 percent in October, after dropping to 7.8 percent the previous month, the lowest since January 2009, as employers took on more part-time workers. It was forecast to rise to 7.9 percent, according to the median estimate of 88 economists surveyed by Bloomberg.
“We’ll still bounce around and have some volatility,” said Steven Ricchiuto, said chief economist at Mizuho Securities USA Inc. in New York. “The next big thing for the bond market is the elections.”
The payrolls data comes four days before the U.S. presidential election. Employment and the economy are central themes in the campaign, with Obama and Romney each trying to convince voters they can best energize the expansion and create jobs. The jobless rate had stayed above 8 percent since February 2009.
Bond investors are better off during the Obama administration now than four years ago, Bank of America Merrill Lynch bond index data show.
From Treasuries to mortgage securities to corporate bonds, returns on U.S. fixed-income assets have averaged 6.6 percent throughout Obama’s term, exceeding the 4.6 percent during the previous four years under George W. Bush, according to Bank of America indexes. Yields on America’s fixed-income assets yield nine basis points less than the global average, compared with 51 basis points more back then, the data shows.
Debt Returns
U.S. government debt securities have returned 24.7 percent since the end of October 2008, including reinvested interest, or 5.7 percent a year, Bank of America Merrill Lynch’s U.S. Treasury Master Index shows. That compares with 21.6 percent for government debt worldwide, according to the firm’s indexes.
U.S. initial applications for jobless benefits dropped 9,000 to 363,000 last week, the Labor Department said yesterday. Companies added 158,000 workers in October, according to an industry report. The increase was higher than forecast, data from the Roseland, New Jersey-based ADP Research Institute showed. It was the first ADP report derived using a larger sample and new methodology.
Federal Reserve Bank of Boston President Eric Rosengren said the central bank should buy mortgage bonds until the jobless rate falls to 7.25 percent and hold the target interest rate near zero until hitting 6.5 percent unemployment.
Inflation Watch
“As long as inflation and inflation expectations are expected to remain well-behaved in the medium term, we should continue to forcefully pursue asset purchases,” Rosengren said yesterday in a speech in Wellesley, Massachusetts.
The Federal Open Market Committee said on Oct. 24 it will continue buying $40 billion in mortgage-backed securities each month, aiming to reduce unemployment. It reiterated that it will probably keep its benchmark interest rate near zero at least through the middle of 2015.
The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years. It plans to sell as much as $8 billion of debt maturing from February 2013 to April 2014 today as part of the program, according to Fed Bank of New York’s website.
Pacific Investment Management Co., which runs the world’s biggest mutual fund, favors inflation protection in the U.S., betting stimulus efforts around the world will stoke faster price increases.
Central Banks
“Central banks have implemented increasingly far-reaching policy measures and they are more willing to take inflation risk as a trade-off for growth and employment,” said Michael Althof, a senior portfolio manager in Munich. “Index-linked bonds are good assets to have, as longer-term we think the pressure for higher inflation is there.”
U.S. consumer prices increased 2 percent in September from a year earlier, based on the latest data from the Labor Department, meaning 10-year notes have a negative real yield.
The difference between 10-year yields and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for costs in the economy over the life of the debt, was 2.52 percentage points. The average over the past decade is 2.18 percentage points.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net;
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
