Treasuries Fall On Signs of Labor Market Improvement and as Dollar Surges
March 2 (Bloomberg) -- The 10-year U.S. Treasury note had its biggest drop since January on signs job growth is accelerating, raising the possibility the Federal Reserve will raise its benchmark interest rate by the end of September.
A sluggish labor market has been a main reason why the Fed has kept from raising its target lending rate from 1 percent. Demand for Treasuries also fell as the U.S. dollar surged, raising the prospect that foreign central banks may curb their purchases of the currency and use the proceeds to buy U.S. debt.
``The prospects don't look good for long-term Treasuries right now,'' said Richard Schlanger, who helps manage about $4 billion of bonds at Pioneer Investment Management in Boston and owns a smaller percentage of Treasuries than in benchmark indexes. ``Things are looking a lot better in manufacturing. That's going to translate eventually into job gains.''
The benchmark 4 percent note maturing in February 2014 fell 11/16, or $6.88 per $1,000 face amount, to 99 17/32 as of 1:47 p.m. in New York, according to Banc of America Securities. The yield rose almost 9 basis points, or 0.09 percentage point, to 4.06 percent, the biggest increase since Jan. 28. The 1 5/8 percent note due in February 2006 fell 1/8 to 99 13/32, as its yield rose 7 basis points to 1.72 percent.
Treasuries extended their declines as the dollar surged against the euro and yen. The Bank of Japan is one central bank that has sold its currency for dollars, parking much of the proceeds in Treasuries. The U.S. dollar advanced against 13 of 16 major currencies followed by Bloomberg News, reaching its highest against the yen since Nov. 7.
A `Negative'
With a stronger dollar, ``there'll be less intervention from foreigners, notably the Japanese, and because of less intervening there'll be less dollars to move into Treasuries, so a stronger dollar becomes a negative for the Treasury market,'' said Brian Edmonds, head of Treasury trading at Banc of America Securities LLC in New York. The firm is one of 23 primary U.S. government securities dealers that trade with the Fed's New York branch.
Friday's employment report may show companies last month added 130,000 jobs, compared with 112,000 in January, according to the median forecast of 59 economists in a Bloomberg News survey. The U.S. economy, the world's largest, hasn't created more than 100,000 jobs for two consecutive months since 2000, when the Fed last raised its target rate for overnight loans between banks.
``Given the strength in the economy, it's hard to make a case for yields falling substantially below 4 percent,'' said Mark Mahoney, head of interest-rate strategy at UBS Securities LLC in Stamford, Connecticut, another primary dealer.
The September Eurodollar futures contract yielded 1.485 percent, up from 1.435 percent yesterday. Eurodollar futures are indications of a three-month lending rate that has averaged 24 basis points above the Fed's target rate the past 10 years.
Inflation Curbed
A lack of job growth has curbed inflation, helping keep Treasury yields low even as economic expansion accelerated. A government report yesterday showed the core price index for personal consumption expenditures rose 0.1 percent in January, compared with a 0.2 percent gain in December. The index is Fed Chairman Alan Greenspan's preferred measure of inflation.
``The market shrugs off all strong economic numbers without much difficulty because it thinks the Fed only cares about two things -- employment and inflation,'' said Scott Gewirtz, co-head of Treasury trading at Deutsche Bank AG in New York, another primary dealer.
Yesterday, the Institute for Supply Management's February manufacturing employment index rose to 56.3 from 52.9, the highest since 1987, while its prices paid index jumped to 81.5 from 75.5.
Foreign Purchases
A slowdown in the purchase of Treasuries by the Bank of Japan may send yields on 10-year notes as high as 5.5 percent by the end of the year, said David Bowers, chief global strategist at Merrill Lynch & Co., another primary dealer.
``If Japan starts to recover, I'm not sure the BOJ will be there buying U.S. Treasuries,'' Bowers said. ``I think the BOJ will ultimately be much more comfortable at letting the yen go up.''
Japan has spent more than 10 trillion yen ($91 billion) selling the yen this year, Chief Cabinet Secretary Yasuo Fukuda said today. Japan's economy grew at a 7 percent annual pace last quarter, its fastest rate in 13 years, largely on higher business spending and exports.
As of December, the Bank of Japan owned $545.2 billion of U.S. government debt, according to the U.S. Treasury. Central banks and other official institutions outside the U.S. hold more than a fifth of publicly traded U.S. federal debt.
`Good Control'
Today, Greenspan said Japan's yen sales ``will have to slow,'' though any foreign sales of Treasuries will have little effect. Greenspan also said the central bank has been ``accommodative for a long time'' in maintaining the benchmark rate at 1 percent. He still said the target rate will have to rise ``at some point.'' Later today, Fed Governor Ben S. Bernanke will speak in Lexington, Virginia.
Greenspan said last week the U.S. is experiencing limited employment growth even as the economy is in a ``more vigorous expansion.'' Job gains have fallen short of economists' forecasts for three months.
Bernanke on Thursday said inflation is ``under very good control.'' His comments reinforced the view the Fed will hold its key interest-rate target at the lowest in more than 45 years through 2004.
bloomberg.com
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