Tags: Treasurys | market | jobless | bonds

Treasurys Decline as September Jobless Rate Falls to 6-Year Low

Friday, 03 October 2014 03:11 PM

Treasurys dropped after a report showed the U.S. unemployment rate fell to a six-year low and more jobs than forecast were added, boosting speculation that the Federal Reserve will boost interest rates next year.

The difference between yields on five- and 30-year debt narrowed to almost a five-year low as longer-term securities benefit from a subdued inflation outlook. Yields on benchmark 10-year notes rose after the Labor Department said the U.S. added 248,000 jobs in September, compared with a forecast for a 215,000 increase in a Bloomberg News survey. The jobless rate fell to 5.9 percent from 6.1 percent.

“The report confirmed that we are in store for faster rather than slower normalization of Fed policy,” Jeffrey Rosenberg, the chief investment strategist for fixed-income at BlackRock Inc., said. “The front end of the curve is moving high in yield, but the back end is holding in because of the lack of inflation concerns.”

The U.S. 10-year note yield, a benchmark for global borrowing costs, rose two basis points, or 0.02 percentage point, to 2.45 percent at 2:31 p.m. New York time, according to Bloomberg Bond Trader data. The 3.375 percent securities maturing in August 2024 dropped 5/32, or $1.56 per $1,000 face amount, to 99 3/8. The yield rose as much as six basis points.

Yield Difference

The difference between the yields on five-year notes and 30-year bonds, the yield curve, narrowed to 1.40 percentage points, almost the least since 2009. The curve usually steepens as the economy heats up as investors anticipating faster growth and inflation.

“The five-year note sector is getting hit, but we haven’t seen the curve steepen, and that’s interesting,” said Donald Ellenberger, who oversees about $10 billion as head of multi- sector strategies at Federated Investors in Pittsburgh. “The market believes the Fed will keep a lid on long rates, even as they increase the probability of a sooner tightening.”

Treasurys were set for a third weekly gain as the European Central Bank yesterday kept interest rates unchanged at record lows and announced plans to start buying covered bonds this month.

The ECB’s Governing Council left the main refinancing rate at 0.05 percent at its meeting yesterday in Naples, Italy. The decision was predicted by all 60 economists in a Bloomberg News survey. The deposit rate and the marginal lending rate remained at minus 0.2 percent and 0.3 percent, respectively.

Foreign Comparison

U.S. 10-year notes yielded 1.52 percentage points more than their German counterparts after reaching 1.57 on Sept. 17, the most since June 1999.

“That’s a sign that U.S. economic fundamentals are not the key driver of rates right now,” said Michael Cloherty, head of U.S. rates strategy at Royal Bank of Canada’s RBC Capital Markets unit in New York. “What’s going on overseas, and its knock on impacts, have taken a greater role.”

With the U.S. adding jobs at a pace of 227,000 per month this year, the fastest employment growth since 1999, without spurring enough inflation to meet the Fed’s 2 percent target for the personal consumption expenditures deflator, investors and strategists are turning more of their focus to secondary measures of the strength of the labor market.

“We’re not getting a lot of inflation in terms of wages along with increases in employment,” said Dan Heckman, a senior fixed-income strategist at U.S. Bank Wealth Management, which oversees $120 billion. The drop in unemployment below 6 percent means “a lot of analysts will be looking at the first fed funds rate increase coming in the first quarter more so than the second half,” he said.

Price Levels

The last time consumer-price increases were slowing before the Fed started increasing borrowing costs was in 1994, when Treasurys lost 3.3 percent in what was then the biggest selloff on record. At the time, Fed Chairman Alan Greenspan shocked the financial world by doubling the benchmark rate to 6 percent, even though inflation was at a seven-year low of 2.5 percent.

The Fed’s measure of five-year inflation expectations five- years in the future, known as the five-year five-year forward breakeven rate, was 2.17 percent on Sept. 29, down from 2.69 percent at the end of last year and the lowest in three years.

“One thing investors are targeting is there’s very little inflation in the system,” said Thomas di Galoma, head of fixed income rates at ED&F Man Capital Markets in New York. “There’s still a big deflationary trend that continues throughout the world.”

Traders anticipate the Fed will start boosting short-term rates in September and lift them to about 0.75 percent by the end of 2015, futures trading shows. Fed officials raised their median rate forecast this month by a quarter-percentage point to 1.375 percent for the end of 2015.

Ten-year yields will rise to 2.78 percent by Dec. 31, according to a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.

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Treasurys dropped after a report showed the U.S. unemployment rate fell to a six-year low and more jobs than forecast were added, boosting speculation that the Federal Reserve will boost interest rates next year.
Treasurys, market, jobless, bonds
Friday, 03 October 2014 03:11 PM
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