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Portfolio > Mutual Funds > Bond Funds

Treasuries rally as jobs gain trails forecast

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(Bloomberg) — Treasuries rose the most since January after a report showing U.S. employers added fewer jobs than forecast in March eased concern that the Federal Reserve would accelerate the unwinding of monetary stimulus.

Yields on five-year notes dropped the most in two months, widening the gap with 30-year bonds to 1.87 percentage points, or 187 basis points. The yield curve, which investors view as a barometer of growth expectations, had flattened to the least since 2009 last month after the Fed signaled that a strengthening economy may prompt policy makers to raise rates sooner than forecast next year. Hourly wage growth was unchanged last month, indicating few inflationary pressures.

“The market was way out over its skis looking for the big payroll number and the bad price action,” said David Robin, an interest-rate strategist in New York at Newedge USA LLC, an institutional-brokerage firm. “People were overextended and just too short ahead of the report. If you look at the moving average of the payroll data and other measures it shows the Fed isn’t even close — they are like miles away from” tightening policy.

The 10-year yield fell seven basis points, or 0.07 percentage point, to 2.73 percent at 12:28 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note due February 2024 rose 19/32 or $5.94 per $1,000 face amount to 100 6/32.

Note rally

Five-year note yields fell nine basis points to 1.71 percent, touching the biggest drop since Jan. 24, while seven- year note yields declined 10 basis points to 2.29 percent, reaching the largest decline since Jan. 23.

The Bloomberg U.S. Treasury Bond Index has fallen 0.3 percent this week through yesterday.

The difference between yields on five- and 30-year securities rose four basis points, the most on a closing basis since Feb. 7. The gap narrowed to 178 on March 31, the least since October 2009.

“What we’re seeing is a modest relief trade where the belly’s outperforming, having underperformed handsomely over recent days,” said William O’Donnell, head U.S. government-bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, referring to five- and seven-year notes. “A lot of people were looking for a gangbuster number above the consensus of 200,000. It’s not the number a lot of people feared, at least in bond market terms.” Weather change

Colder-than-average U.S. winter weather spawned a debate about how much of the drop-off from last year’s pace of job gains is attributable to a softening in the economy. The economy added 192,000 jobs last month, trailing a median forecast for 200,000, according to a Bloomberg News survey of economists.

“In all likelihood, the Fed’s going to remain accommodative,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “You have to be encouraged that the hours worked were up; that’s a good sign. The participation rate was up; that’s a good sign.”

The labor force participation rate, which measures the percentage of people actively working or seeking employment, rose to 63.2 percent in March from 63 percent the month before, Labor Department data showed. Weekly hours spent working rose to 34.5 last month from 34.2 in February.

Fed policy makers decided to trim buying further at its March 19 meeting, sticking to their plan for a gradual withdrawal from the program, designed to cap long-term borrowing costs and spur growth. The central bank has held its target for the federal funds rate virtually at zero since December 2008.

Wage level

Hourly wage growth was unchanged in March, trailing the median estimate for a 0.2 percent gain in a Bloomberg survey of economists.

“The funds rate only moves if and when you get some form of velocity to the credit expansion they’ve tried to do,” said James Camp, a portfolio manager who oversees $5.5 billion in fixed income with Eagle Asset Management in St. Petersburg, Florida, a unit of Raymond James. “By velocity I mean bank lending, wage growth, capital spending — some sort of real economic activity, not just financial market recovery.”

Demand for inflation protection has declined since Fed Chair Janet Yellen said on March 31 that slack in labor markets showed that the central bank’s accommodative policies will be needed for some time. Today’s jobs report added to an outlook for growth that won’t be sufficient to stoke inflationary pressures.

Fund flows

Investors pulled money out of exchange-traded funds tracking U.S. inflation the past three days, with outflows on April 2 the biggest since April. Traders withdrew $457 million alone from the iShares TIPS ETF, the largest fund tracking Treasury Inflation Protected Securities, during the past three trading day.

Withdrawls on April 2, at $212 million, were the largest one-day outflow since $511 million exodus on April 22, 2013 according to data compiled by Bloomberg.

The difference between the yields on five-year notes and similar maturity TIPS, a gauge of the outlook for consumer prices over the life of the debt known as the break-even rate narrowed to 1.84 percentage points, the least since Jan. 2.

Ten-year note yields will climb to 3.38 percent by year- end, according to a Bloomberg survey of economists and analysts with the most recent forecasts given the heaviest weightings.

The U.S. announced yesterday it will auction $30 billion of three-year notes on April 8, $21 billion in 10-year debt the next day and $13 billion of 30-year bonds on April 10.

–With assistance from Cordell Eddings in New York.


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