Treasury Yields Surge as Jobs Numbers Ignite Sell-off

Friday, 08 Nov 2013 04:36 PM

 

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Prices of U.S. Treasury securities lost the most in four months Friday — pushing yields sharply higher — after a report showed the economy added more jobs last month than forecast, boosting speculation the Federal Reserve may slow bond purchases as soon as its Dec. 17-18 meeting.

Yields on benchmark 10-year notes reached the highest in more than three weeks as payrolls grew by 204,000 in October versus the 120,000 median forecast of 91 economists in a Bloomberg News survey. Atlanta Fed President Dennis Lockhart said more needs to be done amid the progress on jobs. Hedge-fund managers increased bets to the most in 18 months that 10-year note futures will decline, as yields climb.

“The discussion and the decision of taper is back on the table,” said Dan Heckman, a fixed-income strategist in Kansas City, Missouri, at U.S. Bank Wealth Management, which oversees $112 billion. “They could announce it in December and start in January; that’s a real possibility. This is forcing yields on the long end higher.”

The benchmark U.S. 10-year yield rose 15 basis points, or 0.15 percentage point, to 2.75 percent at 4:03 p.m. New York time, Bloomberg Bond Trader data showed. The price of the 2.5 percent note due August 2023 lost 1 9/32, or $12.81 per $1,000 face amount, to 97 27/32.

Short Bets

The yield rose the most since July 5. It reached 3.01 percent on Sept. 6, breaching 3 percent for the first time since July 2011.

With Friday’s increase, the yield on the 10-year note is still trading just around the three-month average of 2.71 percent, according to Bloomberg data.

Hedge fund managers and other large speculators increased net short positions in 10-year note futures in the week ending Nov.5 to the biggest since April 2012, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 189,188 contracts on the Chicago Board of Trade.

Treasury 10-year notes are at their cheapest level since Sept. 23, based on the 0.33 percent level on the so-called term premium, a valuation model used by the Fed that is calculated by using interest-rate expectations, economic growth and inflation. The gauge has averaged negative 0.04 percent this year, indicating the securities were overvalued. The security is considered at fair value at a term premium level between 25 basis points to 75 basis points.

Economic Outlook

“If the payrolls start to crank up, the market is going to be getting ready for the future action of the Fed,” said William Larkin, a fixed-income portfolio manager who helps oversee $500 million at Cabot Money Management Inc., in a telephone interview from Salem, Massachusetts. “We’re going to be data dependent, which means economic releases will have a heavy weight in market direction. There will be a lot more volatility as people trade out of positions.”

The Treasury is scheduled to sell $70 billion in notes and bonds next week, including $30 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days starting Nov. 12. The amount is down from $72 billion the previous quarter.

Traders are pricing in a 21.7 percent probability that the Fed will raise its benchmark overnight rate by its January 2015 meeting, down from a 70.7 percent likelihood on Sept. 5, the day before the August payroll data was released. The Fed has kept its target rate unchanged at zero to 0.25 percent since December 2008.

Fed policy should be accommodative for “quite some time,” Lockhart said Friday in a speech in Oxford, Mississippi, adding that employment may be short of the fed’s goal at the end of 2014.

Meeting Reaction

Yields rose after the Federal Open Market Committee said Oct. 30 that the economy showed signs of “underlying strength” even as policy makers agreed to continue the monthly bond purchases, known as quantitative easing. The Fed purchased $5.25 billion in Treasurys maturing between August 2018 and July 2019 today.

Economists predict the Fed will maintain its $85 billion of monthly bond purchases at the current pace until March, according to a Bloomberg survey conducted Oct. 17-18. They forecast the government closure cut growth by 0.3 percentage point this quarter.

“The market’s going to price in an earlier, versus late first quarter/early second quarter, taper,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “This was an October surprise,” he said, referring to the payrolls report.

A report Thursday showed U.S. gross domestic product grew at an annualized 2.8 percent rate in the third quarter, exceeding forecasts for a 2 percent gain. The report along with today’s payroll’s numbers increased speculation the U.S. will be cutting back on stimulus as the European Central Bank looks to intensify its accommodative policies, suggesting U.S. Treasurys may continue to lure buyers of government debt.

‘Differing Economies’

ECB President Mario Draghi and policy makers have just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB’s target and unemployment is at the highest level since the currency bloc was formed in 1999.

“Draghi and the FOMC are faced with monetary policy decisions for differing economies,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “Where the Fed is concerned with scaling out of QE as employment continues to improve, Draghi is faced with a potentially deflationary environment.”

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