U.S. five-year notes traded at almost the cheapest level since 2010 versus two- and 10-year securities.

(Bloomberg) — Treasuries fell as a report showed jobless claims were lower than forecast last week, reinforcing speculation the Federal Reserve will continue to reduce its bond-buying stimulus program as the economy strengthens.

U.S. five-year notes traded at almost the cheapest level since 2010 versus two- and 10-year securities amid speculation economic growth will lead the central bank to raise interest rates in 2015. Fed Chair Janet Yellen said yesterday the central bank is committed to policies that will support the recovery. The U.S. is scheduled to sell $18 billion of five-year Treasury Inflation Protected Securities today.

“She was very, very intentional about explaining her vision for the approach to adapting fed policy to economic performance,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The fives will be the first place to cheapen as the Fed looks to tighten.”

U.S. five-year yields rose three basis points, or 0.03 percentage point, to 1.68 percent as of 8:37 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in March 2019 was 99 3/4.

Benchmark 10-year note yields added three basis points to 2.66 percent.

Holiday pause

Trading of U.S. government securities is scheduled to close at 2 p.m. in New York and stay shut tomorrow for Good Friday, according to the Securities Industry & Financial Markets Association. On April 21, trading will stop at 3 p.m. in Japan and remain closed during London hours for the U.K.’s Easter Monday. The market will open as usual in the U.S. on April 21.

Five-year TIPS yielded negative 0.50 percent before today’s auction, versus the 12-month average of minus 0.63 percent. The previous sale of five-year TIPS in December drew bids for 2.5 times the amount of debt offered, up from 2.2 at a prior auction in August.

The butterfly spread, the five-year note versus two- and ten-year debt, was 28 basis points after climbing to 29 basis points yesterday. That level is close to the highest in four years, with the increase reflecting waning demand for the middle security versus the other two. Jobless claims increased by 2,000 to 304,000 in the week ended April 12 from a revised 302,000 the prior period that was the lowest since September 2007, a Labor Department report showed. The median forecast of 47 economists surveyed by Bloomberg called for an increase to 315,000.

Yellen speech

“There is little question that the economy has remained far from maximum employment,” Yellen said in a speech to the Economic Club of New York.

“Yellen didn’t deliver major surprises,” said Michael Leister, a senior fixed-income strategist at Commerzbank AG in London. “Treasuries are under pressure a bit. The curve shows there is still an expectation” of interest rate rises next year, he said.

Commerzbank expects the first U.S. rate rise to come in the second quarter of 2015, Leister said.

While the Fed may hold its borrowing costs for now, the speech doesn’t change the outlook for increases in 2015, according to Will Tseng, a trader in Taipei at Mirae Asset Global Investments Co. “Next year, the Fed is going to choose a tightening policy,” he said.

Tseng bought 10- and 30-year Treasuries in March and again in April, saying they will benefit from slow inflation.

Ukraine watch

Stock losses earlier this month, unrest in Ukraine and slowing economic growth in China helped drive demand for longer- term Treasuries, said Yoshiyuki Suzuki, the head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $59.4 billion in assets.

“Investors are seeking a safe haven,” he said.

The difference between five- and 30-year yields narrowed to 1.80 percentage points yesterday, the lowest since 2009 based on closing levels. The spread was 1.81 percentage points today.

Fed policy makers are unwinding the bond-buying program they have used to support the economy. They have kept their target for overnight lending between banks in a range of zero to 0.25 percent since 2008.

Reports show the expansion is gaining momentum after winter weather depressed consumption and disrupted homebuilding and manufacturing.

A Fed report yesterday showed industrial production rose more than forecast in March after a February gain that was twice as big as previously estimated. Retail sales rose last month at the fastest pace since September 2012.

Private payrolls rose by 192,000 workers in March, following an 188,000 gain the month before. That brought the job count to 116.1 million, exceeding the pre-recession peak for the first time.

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