By Daniel Kruger & Cordell Eddings - Aug 2, 2013 9:51 PM GMT+0400
Treasuries gained, pushing 10-year yields down the most in almost a month, after employment growth in July trailed forecasts, damping speculation the Federal Reserve will slow the pace of bond purchases next month.
U.S. debt erased losses as the report reduced the likelihood that the central bank will announce plans to slow the pace of purchases next month, said Pacific Investment Management Co.’s Mohamed El-Erian. The report combined with the Fed’s July 31 statement, which failed to address the issue of tapering, to bolster speculation that policy makers need more data showing substantial progress toward their goals of lower unemployment and sustainable levels of inflation to build a case to reduce the $85 billion a month of bond purchases.
Aug. 2 (Bloomberg) -- Employers added fewer workers than anticipated in July even as the U.S. jobless rate dropped to 7.4 percent, indicating uneven progress in the labor market. The 162,000 increase in payrolls last month was the smallest in four months and followed a revised 188,000 rise in June that was less than initially estimated, Labor Department figures showed today in Washington. Peter Cook reports on Bloomberg Television's "In the Loop." Source: Bloomberg)
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“The Fed would like to reduce the pace of stimulus, but they need an economic reason to do so,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG in New York, one of 21 primary dealers that trade with the Fed. “They could make a move in September, but it could be smaller than initially thought.”
The benchmark U.S. 10-year yield fell 10 basis points, or 0.10 percentage point, to 2.61 percent at 1:44 p.m. New York time, Bloomberg Bond Trader data showed. The price of the 1.75 percent note due in May 2023 gained 3/4, or $7.50 per $1,000 face amount, to 92 19/32. The yield rose as much as four basis points earlier, touching the highest level since July 8.
Thirty-year bond yields dropped five basis points to 3.71 percent, after touching 3.78 percent, the highest since August 2011.
Market Reset
“We are reversing the increase in yields we had over the last couple of days on an optimistic assessment of where the labor market was likely to go,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “We remain in the most recent range -- between 2.50 and 2.75 percent -- for the foreseeable future until the trend in the economic data suggests otherwise.”
The Fed’s purchases are intended to put downward pressure on interest rates, and policy makers are discussing whether the economy has improved enough for them to start reducing the purchases.
“Economic activity expanded at a modest pace during the first half of the year,” the Fed said following a two-day meeting of the Federal Open Market Committee July 31. “The Committee recognizes that inflation persistently below its 2 percent objective could pose risks to economic performance, but it anticipates that inflation will move back toward its objective over the medium term.”
Jobs Data
U.S. debt erased losses after the Labor Department reported 162,000 added jobs in July, compared with the median forecast of 185,000 in a Bloomberg News survey, while theunemployment rate fell to 7.4 percent. Treasuries rallied after the Fed’s July 31 statement.
The economy has added an average of 192,000 jobs this year through July, the fastest pace since 2005 when it created 207,000 positions per month, Labor Department data show. Average hourly earnings declined by 0.1 percent in July after a 0.4 percent gain in June, which was the highest since November. The median forecast in a Bloomberg News survey was for a 0.2 percent gain.
“If they’re going to taper, they have to taper not just because the economy is improving, but because they’re worried about the collateral damage,” Pimco’s El Erian, chief executive and co-chief investment officer at the world’s biggest manager of bond mutual funds, said on Bloomberg Television’s “In the Loop” with Betty Liu.
Futures Data
Fed funds futures show a 42.9 percent probability that the central bank will raise borrowing costs in January 2015 for the first time after the 2008 financial crisis, down from 49.8 percent yesterday.
The personal consumption expenditure deflator, the Fed’s preferred gauge of inflation, rose to 1.3 percent in June from a year earlier, rising from a 1 percent rise in May and a 0.7 percent increase in April that was the smallest since 2009, the Commerce Department reported today inWashington.
The PCE deflator rose 0.4 percent on a monthly basis, the most since February. The measure had declined in March and April, the first consecutive decrease since 2008.
“As long as the inflation numbers do turn up that does give the Fed the bandwidth to exit QE,” said Gemma Wright-Casparius, who manages the $32.1 billion Vanguard Inflation-Protected Securities Fund at Valley Forge, Pennsylvania-based Vanguard Group Inc.
The government will sell $72 billion of notes and bonds next week, raising $2.4 billion of new cash as investors will redeem $69.6 billion of securities maturing on Aug. 15.
Note Sale
The Treasury Department said July 31 it plans to sell the first floating-rate notes in January and expects to gradually decrease coupon-auction sizes during the coming quarter as the nation’s fiscal health improves.
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 ongovernment securities in four years.
Investors bid $2.91 for each $1 of the $1.257 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.
Ten-year notes yielded 37 basis points more than bonds in an index of their G-7 peers yesterday, the biggest difference since May 2010, according to data compiled by Bloomberg.
U.S. government securities fell for a third month in July, declining 3.5 percent since April based on the Bloomberg U.S. Treasury Bond Index. (BUSY) Investment-grade company debt declined 4.1 percent over the past three months even after gaining in July, the Bloomberg USD Corporate Bond Index (BUSC) shows.
To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
