Treasuries Drop Most in 2 Years as Jobs Growth Supports Tapering
By Susanne
Walker & Daniel Kruger - Jul 5, 2013 2:21 PM
PT
Treasury 10-year notes tumbled the most in almost two years after
stronger-than-forecast employment growth stoked speculation the Federal Reserve
will begin to reduce the size of its asset purchases.
“Everybody is in the camp that the Fed is going to do something -- the
question is when,” said Michael Franzese, senior vice president of fixed-income
trading at ED&F Man Capital Markets in New York.
The spread was 2.75 basis points, after being as much as negative 12 basis points on June 19.
The central bank has been buying $85 billion in bonds monthly, a policy known as quantitative easing, to cap borrowing costs and stimulate the economy. It has kept its target rate at the zero to 0.25 percent level since December 2008.
“Expectations for a September taper are being completely priced in,” Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Fed. “The market’s expecting a smaller balance sheet going forward.”
European Central Bank President Mario Draghi pledged yesterday to keep interest rates at a record low for an “extended period.”
U.S. gross domestic product expanded at a revised 1.8 percent annualized rate from January through March, down from a prior estimate of 2.4 percent, the Commerce Department said June 26. The economy will grow 1.9 percent for 2013, according to the median forecast of 86 economists in a Bloomberg News survey in June, down from last year’s 2.2 percent increase.
A measure of demand at the U.S. Treasury Department’s debt auctions has fallen this year to the lowest level since 2009 as a drop in bond prices generates the biggest losses on government securities in four years.
Investors bid $2.94 for each $1 of the $1.077 billion of notes and bonds sold by the Treasury this year, compared with a record high $3.15 of bids last year. It’s the first decline in demand at the auctions since 2008, when the U.S. government increased note and bond offerings 59 percent to $922 billion as the recession and the financial crisis deepened.
The U.S. will sell $32 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year notes on three consecutive days starting July 9.
“The supply will be absorbed fairly well because of where rates are right now,” Franzese of ED&F Man said.
Yields climbed to the highest
levels since August 2011 as a Labor Department report showed the economy added
195,000 jobs in June, compared with the median forecast of 165,000 in a
Bloomberg News survey. Fed Chairman Ben S. Bernanke said last month policy
makers may “moderate” their bond-buying program this year and may end it
mid-2014 if growth meets forecasts. The rate to exchange floating for
fixed-rate payments for 30 years rose above the yield on similar maturity
Treasury bonds for the first time since August 2009.
July 5 (Bloomberg) -- U.S. payrolls rose in June by 195,000
workers, more than forecast, for a second straight month, the Labor Department
reported today in Washington. The jobless rate stayed at 7.6 percent, while
hourly earnings in the year ended in June advanced by the most since July 2011.
Megan Hughes and Michael McKee report on Bloomberg Television's "In the Loop."
(Source: Bloomberg)
July 4 (Bloomberg) -- European Central Bank President Mario
Draghi talks about the decision to leave the benchmark interest rate at 0.50
percent, forward guidance and the euro-zone economy. Draghi, speaking in
Frankfurt at his monthly news conference, also discusses inflation expectations.
(Excerpts. Source: Europe by Satellite)
June 19 (Bloomberg) -- Federal Reserve Chairman Ben S. Bernanke
offers his views on the outlook for the U.S. economy and labor market, and the
central bank's unprecedented bond-buying program and benchmark interest rate.
Bernanke speaks at a news conference following a meeting of the central bank's
policy-setting Federal Open Market Committee in Washington. (Excerpts. Source:
Bloomberg)
The 10-year note yield increased 24 basis points, or 0.24 percentage point, to
2.74 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices,
the highest yield and biggest climb since August 2011. The 1.75 percent note
maturing in May 2023 fell 1 30/32, or $19.38 per $1,000 face value, to 91 1/2.
The yield on the 30-year bond rose 22 basis points to 3.7 percent, the
highest level since August 2011.
The U.S. bond market was closed yesterday for a public holiday. Swap Spread
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index closed at 117.89, the highest level since December 2010. The one-year average is 63.6.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S.
government debt, rose to $411.8 billion from $241.4 billion on July 3 when the
U.S. market closed at 2 p.m. New York time. The 2013 average is $322.5 billion.
The 30-year swap spread moved above zero in a continuation of the rise that
has taken place over the past year as Dodd-Frank Act regulations increased costs
for swap transactions and made Treasury securities an attractive alternative.
The spread was 2.75 basis points, after being as much as negative 12 basis points on June 19.
Worst Performance
Treasuries in May and June lost 3.2 percent, their worst two-month performance since the first two months of 2009 when they lost 3.6 percent, Bank of America Merrill Lynch indexes show. U.S. government securities declined 2.5 percent in the first half of the year, their worst start since 2009 when they dropped 4.5 percent, the indexes show.
An improving economy is
dimming the lure of bonds as a haven. The Conference Board’s Consumer Confidence (CONCCONF) index rose in June to 81.4,
exceeding all forecasts in a Bloomberg survey and the highest since January
2008, the New York-based private research group said June 25. Home prices have
increased 12 percent since April 2012, according to the
S&P/Case-Shiller Composite index.
“It is a strong report that does
keep the Fed on the taper trail,” Tony Crescenzi, executive vice president at
Newport Beach, California-based Pacific Investment Management Co., said of the
employment data in a radio interview on “Bloomberg Surveillance” with Tom Keene.
Economists at Goldman Sachs Group Inc. and JPMorgan Chase & Co. said the
Federal Open Market Committee will begin tapering sooner than they had expected
after today’s Labor Department report. Quantitative Easing
“The labor market has continued
to improve,” Bernanke said at his June 19 press conference. “Job gains, along
with the strengthening housing market, have in turn contributed to increases in
consumer confidence and supported household spending.”
The unemployment rate for June remained at 7.6 percent compared with the
Bloomberg News survey of economists forecast of 7.5 percent. The economy has
added an average of 189,000 jobs this year through May, the fastest pace since
2005 when it created 207,000 positions per month, Labor Department data show.
The central bank has been buying $85 billion in bonds monthly, a policy known as quantitative easing, to cap borrowing costs and stimulate the economy. It has kept its target rate at the zero to 0.25 percent level since December 2008.
“Expectations for a September taper are being completely priced in,” Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Fed. “The market’s expecting a smaller balance sheet going forward.”
Demand Falls
The Fed on July 10 will release minutes of its June 18-19 policy makers’ meeting.European Central Bank President Mario Draghi pledged yesterday to keep interest rates at a record low for an “extended period.”
U.S. gross domestic product expanded at a revised 1.8 percent annualized rate from January through March, down from a prior estimate of 2.4 percent, the Commerce Department said June 26. The economy will grow 1.9 percent for 2013, according to the median forecast of 86 economists in a Bloomberg News survey in June, down from last year’s 2.2 percent increase.
A measure of demand at the U.S. Treasury Department’s debt auctions has fallen this year to the lowest level since 2009 as a drop in bond prices generates the biggest losses on government securities in four years.
Investors bid $2.94 for each $1 of the $1.077 billion of notes and bonds sold by the Treasury this year, compared with a record high $3.15 of bids last year. It’s the first decline in demand at the auctions since 2008, when the U.S. government increased note and bond offerings 59 percent to $922 billion as the recession and the financial crisis deepened.
The U.S. will sell $32 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year notes on three consecutive days starting July 9.
“The supply will be absorbed fairly well because of where rates are right now,” Franzese of ED&F Man said.
To contact the reporters on this
story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net
To contact the editor
responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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