Treasuries Head for Weekly Loss on Speculation U.S. Job Growth Accelerated

By Monami Yui and Wes Goodman - Dec 2, 2011 1:58 PM GMT+0700

Treasuries headed for their steepest weekly loss since October before a government report today that economists said will show U.S. jobs growth quickened last month, confirming a pickup in the world’s largest economy.

The difference between rates on 10-year notes and inflation-indexed securities, a gauge of expectations for consumer prices over the life of the debt, widened to 2.11 percentage points yesterday, the most in two weeks. The five- year average is 2.04 percentage points. James Bullard, president of the Federal Reserve Bank of St. Louis, said recent reports point to stronger growth and the central bank shouldn’t rush to ease monetary policy further.

“The current yield level is too low given the growth outlook,” said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “Yields are likely to rise gradually as we continue to see good numbers in the U.S. economy.”

Benchmark 10-year yields were little changed at 2.09 percent as of 6:52 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 changed hands at 99 6/32. The rate reached 2.14 percent yesterday, the highest since Nov. 14, and it has advanced 12 basis points this week, the most since the five-day period ended Oct. 14.

The yield will advance to 2.18 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. SMBC Nikko’s Shimazu predicts 2.3 percent.

Japan’s 10-year bonds yielded 1.065 percent, versus an average of 1.085 percent when the securities were sold yesterday. Ten-year rates climbed to 1.09 percent yesterday, the most since July.

Jobs Data

The U.S. added 125,000 jobs in November, compared with 80,000 in October, the Labor Department will say today, according to the median estimate in a Bloomberg News survey of economists. The jobless rate probably held at 9 percent, based on the responses.

U.S. manufacturing expanded in November at the fastest pace in five months, the Institute for Supply Management in Tempe, Arizona, reported yesterday. The New York-based Conference Board said last month that its index (MXWD) of consumer confidence rose in November by the most since April 2003.

Returns in 2011

This week’s decline wasn’t enough to knock Treasuries from their place as one of the best-performing bond markets this year, with the gain driven by demand for the relative safety of American securities during Europe’s debt crisis.

Treasuries due in 10 years and more have returned 18 percent in the past six months, the most among 144 bond indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies after accounting for currency changes. Benchmark 10-year yields are about 42 basis points above the record low of 1.67 percent set Sept. 23.

The MSCI All Country World Index of stocks has handed investors a 6.3 percent loss this year.

“Money is flowing from the euro to Treasuries,” said Yoshiyuki Suzuki, who helps oversee the equivalent of $70.7 billion as the Tokyo-based head of fixed income at Fukoku Mutual Life Insurance Co. “The upside in yields will be limited.”

Germany and France are pushing for closer economic ties among euro nations and tougher enforcement of budget rules to counter the region’s debt crisis, snubbing investor pleas to back an expanded European Central Bank role.

Fed Action

This week’s drop in Treasuries was driven by a Fed announcement on Nov. 30 that that the premium banks pay to borrow dollars overnight from central banks will decline by half a percentage point to 50 basis points.

The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, rose by 36 basis points in two days. It was 1.21 percentage points below the euro interbank offered rate as of yesterday. The two-day increase was the most since December 2008 when credit markets were starting to thaw after seizing up earlier in the year.

Fed officials are debating whether the central bank should resume large-scale purchases of securities to push down an unemployment rate that has been stuck at 9 percent or higher since April.

The Fed is scheduled to sell as much as $8.75 billion of Treasuries due in 2013 today as part of a plan announced in September to replace $400 billion of shorter maturities in its holdings with longer-term debt to cap borrowing costs. It also plans to buy as much as $2.75 billion of securities due from 2036 to 2041 today.

“The data have come in stronger than expected, so I think the logical thing now is to wait and see,” the Fed’s Bullard said in an interview in New York yesterday at the Bloomberg Hedge Fund Conference hosted by Bloomberg Link. “See if we continue to get a good read on the holiday season and start out the New Year stronger or weaker, and also assess the situation in Europe and see how that feeds back to the United States.”

To contact the reporters on this story: Monami Yui in Tokyo at myui1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net