Treasuries rise for a second day as returns exceed rest of world

LONDON – Treasuries gained for a second day, extending an advance that made them the world’s best-performing government bonds in dollar terms over the past month.

The securities rose last week when a government report showed wages held in check as the nation added jobs. The U.S. is selling $26 billion of three-year notes today, followed by 10- year debt and 30-year bonds this week. While yields indicate investors pushed back expectations for a Federal Reserve rate increase by a month, New York Fed President William C. Dudley said borrowing costs will probably rise in 2015.

“The U.S. employment report was slightly disappointing,” said Nick Stamenkovic, a fixed-income strategist at broker RIA Capital Markets Ltd. in Edinburgh. “The reaction of the Treasury markets suggests positioning rather than fundamentals were the main driving force. Tightening labor market conditions keep the Fed on course for a modest tightening in mid-2015.”

U.S. 10-year yields fell one basis point, or 0.01 percentage point, to 2.29 percent at 8:12 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.375 percent note due August 2024 advanced 3/32, or 94 cents per $1,000 face amount, to 100 25/32.

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Treasury 10-year yields dropped nine basis points on Nov. 7 after the Labor Department reported employers added 214,000 jobs in October, versus a forecast in a Bloomberg News survey of economists for 235,000 and a revised September gain of 256,000. The jobless rate fell to 5.8 percent from 5.9 percent.

Average hourly earnings were up 2 percent over the past 12 months, matching September’s level and trailing the 2.1 percent forecast in another Bloomberg survey.

World beaters

U.S. government securities returned 0.2 percent in the month ended Nov. 9, the only one of 26 bond markets to post a gain in dollar terms, according to data compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Treasuries drew investors on Nov. 7 because their yields are more attractive than those on German bunds, according to Morgan Stanley, one of the 22 primary dealers that underwrite the U.S. debt.

Treasury 10-year notes yielded 156 basis points more than same-maturity German debt at the close on Nov. 6, approaching the widest level since 1999.

“We think those levels likely encouraged investors to make the switch out of bonds into Treasuries – taking Treasury yields lower despite another strong employment report,” strategists led by Matthew Hornbach in New York said in a Nov. 7 report.

Debt auctions

After today’s auction, the U.S. also plans to sell $24 billion in 10-year notes Nov. 12 and $16 billion of 30-year bonds Nov. 13. Treasuries will be closed worldwide tomorrow in observance of Veterans Day in the U.S.

At the last three-year sale in October, investors bid for 3.42 times the amount of debt available. It was the highest level since February at the monthly auctions.

The Fed has kept the target for the federal funds rate, which banks charge each other on overnight loans, in a range of zero to 0.25 percent since December 2008.

The implied yield on 30-day fed fund futures contracts expiring in December 2015 was 0.52 percent, the first month that prices in a quarter-point increase. Before the employment report, investors were betting on an increase in November 2015.

“I expect the Federal Reserve will begin to raise its federal funds rate target off the zero lower bound sometime next year,” Dudley said at a conference in Paris Nov. 7.

“Yields will go up by year-end,” said Hiroki Shimazu, the senior market economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank. “There’s no inflation pressure from wages, but it’s natural to think they will become much higher because of the U.S. employment recovery.”

Long bonds

For all the talk that U.S. Treasuries will tumble once the Fed starts to raise interest rates, investors in the longest- dated debt securities are finding little cause for concern.

Government bonds due in 30 years, the most vulnerable to losses when inflation accelerates, have returned more than 20 percent this year, according to Bank of America Merrill Lynch indexes. Three-year notes gained 1.1 percent, the data show.

The difference in performance reduced the yield premium that investors demand to hold the 30-year securities instead of three-year notes to 211 basis points. The spread was as narrow as 206 basis points in October, the smallest since 2009.

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