Treasuries Decline as Jobs Growth, Inflation Weigh on Fixed-Income Demand

Treasuries fell, with 10-year notes halting a three-week rally, as signs of faster job growth and more inflation added to speculation the economic recovery is building momentum, damping demand for fixed-income assets.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, touched 253 basis points yesterday, the most since July 2008, after a report showing the largest monthly job gains since May. Weekly losses were tempered as Libyan leader Muammar Qaddafi sent troops to recapture western towns, adding to concern political turmoil in the oil-producing Mideast and North Africa will spread and escalate.

“The economic numbers are clearly getting stronger and inflation is turning the corner and heading higher, which is weighing on the Treasury market,” Donald Ellenberger, who oversees about $6 billion as co-head of government and mortgage- backed securities at Federated Investors in Pittsburgh. “Still, we have underlying tension between stronger growth and higher oil prices due to the uncertainty in the Middle East that is capping any selloff.”

The yield on the benchmark 10-year note rose eight basis points, or 0.08 percentage point, to 3.49 percent in New York, according to BGCantor Market Data. The price of the 3.625 percent security maturing in February 2021 was at 101 3/32.
Thirty-year bond yields rose 10 basis points, or 0.1 percentage point, to 4.6 percent.

Yield Curve

The yield curve, or the difference between 2- and 10-year Treasury notes, reached 283 basis points yesterday, the widest since Feb. 21.
The Labor Department said payrolls rose by 192,000 in February, after a 63,000 increase in January. Payrolls were projected to climb 196,000, according to the median forecast in a Bloomberg News survey, with estimates ranging as high as 297,000.
The unemployment rate unexpectedly declined to 8.9 percent, the lowest level since April 2009. The jobless rate was projected to rise to 9.1 percent from 9 percent, according to the survey median.

Growth Pace

“We are moving in the right direction, but it wasn’t stellar given what we’ve seen from recent reports,” said Jeffrey Cleveland, senior economist at Payden & Rygel in Los Angeles, which manages $56 billion. “If the report was stronger we would see a flatter curve and some sense in the market that the Federal Reserve would start to prime to exit, but we are still seeing relative steepening.”
The Treasury announced plans to sell $32 billion of 3-year notes, $21 billion of 10-year securities and $13 billion of 30- year bonds next week.
“If rates creep up over 4 percent, I would be incrementally buying interest rates,” Laurence D. Fink, chief executive officer of BlackRock Inc., the world’s largest asset manager, said in a March 3 interview from New York with Bloomberg Television’s Erik Schatzker.
Ten-year yields also surged as European Central Bank President Jean-Claude Trichet said interest rates may be increased at the next meeting. He told reporters in Frankfurt March 3 that inflation risks have moved to the “upside.” The ECB left its benchmark interest rate at a record low of 1 percent.

Fed Numbers

There’s a 33 percent chance the Fed will raise U.S. interest rates from almost zero in December, compared with 47 percent a month ago, according to CME Group Inc. exchange futures. Fed Chairman Ben S. Bernanke and central bank policy markers focus on core inflation, rather than an official target.
“The ECB news may be resetting expectation with likely timing of global central banks becoming more restrictive,” said Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York. “It may mean little for the Fed, but you may see people bring forward their expectations for Fed tightening if data continues to come in better.”
The Fed’s Beige Book report said labor markets improved throughout the country early this year, driven by increasing retail sales and “solid growth” in manufacturing. The central bank’s March 2 report was prepared in advance of the policy- making Federal Open Market Committee meeting March 15.

Central Bank Buys

The Fed bought $24 billion of Treasuries this week and has purchased $397.6 billion of U.S. debt as part of its $600 billion acquisition plan to support the recovery that runs through June. The central bank plans to buy $16 billion to $22 billion of Treasuries next week and issue an updated buying schedule on March 10.
Fed policy makers are signaling they favor an abrupt end to in Treasury purchases in June, jettisoning their prior strategy of gradually pulling back on intervention in bond markets.
“I don’t see a lot of gain to reverting to a tapering approach,” Atlanta Fed President Dennis Lockhart told reporters March 3. “I don’t think that is necessary,” Philadelphia Fed President Charles Plosser said last month.
Treasuries have handed investors a loss of 0.8 percent this year, compared with a gain of 5.9 percent last year, according to Bank of America Merrill Lynch data.