Treasury 10-year yield at one-month high versus S&P dividend

SINGAPORE – Treasury yields were the highest versus U.S. stock dividends in a month after share indexes climbed to a record, driven by the outlook for job gains.

Investors demanded 42 basis points of extra yield to own 10-year Treasuries versus the Standard & Poor’s 500 Index dividend, the most on a closing basis since Oct. 6. The spread has widened from almost zero as recently as Oct. 15, though it is less than the average of 66 for the past year. U.S. employers hired workers at a faster pace in October than the average for 2014, based on a Bloomberg News survey of economists before the report tomorrow.

“The jobs data this week will likely add to evidence that U.S. economic growth is picking up,” said Luca Cazzulani, senior fixed-income strategist at UniCredit Global Research in Milan. “Yields have further room to rise. The Fed has stressed its rate decision is data dependent. If the strength of data continues at this pace, we think it’s possible the first rate increase will take place around mid-2015.”

The Treasury 10-year yield was little changed at 2.34 percent at 8:02 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.375 percent note maturing in August 2024 was 100 11/32.

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U.S. employers added 235,000 workers last month, versus 248,000 in September, based on a Bloomberg survey of economists before the Labor Department releases the monthly report on Nov. 7. This year’s average is 226,670.

Company hiring

First-time claims for unemployment insurance fell to 285,000 last week, down from this year’s high of 351,000 in February, according to responses from economists before today’s data. Company hiring accelerated in October, an industry report showed yesterday.

The Bloomberg U.S. Treasury Bond Index returned 0.7 percent in the past month through yesterday, and has gained 4.9 percent this year.

The S&P 500 Index rose 3 percent in the last month, for an 11 percent gain in 2014, including reinvested dividends, data compiled by Bloomberg show. The index had its highest close on record yesterday, and has a dividend yield of 1.92 percent.

“We have a strong preference for stocks now,” said Will Tseng, a money manager in Taipei at Mirae Asset Global Investments Co. “As long as the economy is growing, people will invest in risky assets more than fixed-income assets.” Mirae manages $62.2 billion.

Fed rates

Yields suggest investors are preparing for the Federal Reserve to raise interest rates next year as the economy improves. The central bank has kept the target for its benchmark, the rate 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 federal fund futures contracts expiring in December 2015 was 0.56 percent, the first month that prices in a quarter-point increase in the rate.

“We expect the first rate hike to occur in the second quarter,” said Tomohisa Fujiki, the head of interest-rate strategy in Japan at BNP Paribas SA, whose New York unit is one of the 22 primary dealers that trade directly with the Fed. “Prices should fall” in the Treasury market.

While the Fed ended the bond-purchase program it used to support the U.S. economy last month, the European Central Bank may start buying government debt by year-end as it combats deflation, Fujiki said.

The ECB kept interest rates unchanged at record lows as investors wait for signs from President Mario Draghi on whether he’ll push for more stimulus for the euro area. The 24-member Governing Council left the main refinancing rate at 0.05 percent at its meeting today in Frankfurt.

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