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Treasuries Drop Before Reports on Jobless Claims, Productivity
By Bo Nielsen and Wes Goodman

June 4 (Bloomberg) -- Treasury 10-year notes fell for the first time in three days before U.S. government reports forecast by economists to show claims for unemployment benefits dropped and workers were more productive.

Yields approached a six-month high as signs of recovery reduced demand for government debt. The U.S. is scheduled to announce today how much it plans to raise in 3-, 10- and 30-year auctions next week, raising speculation yields will have to increase to attract investors.

“Everybody is looking for signs the recession has peaked,” said Morten Hassing Povlsen, senior rates analyst in Copenhagen at Nordea Bank AB, Scandinavia’s biggest lender. “Yields have surged lately as a direct result of the improvements in the economic indicators.”

The yield on the 10-year note increased three basis points, or 0.03 percentage point, to 3.57 percent at 6:47 a.m. in New York, according to BGCantor Market Data. The price of the 3.125 percent security due in May 2019 fell 7/32, or $2.19 per $1,000 face amount, to 96 1/4.

Yields climbed to 3.75 percent on May 28, the highest level since November, increasing from a record low of 2.04 percent on Dec. 18.

Initial jobless claims in the U.S. decreased to 620,000 for the seven days ended May 30, from 623,000 a week earlier, according to the median forecast of 43 economists surveyed by Bloomberg News. Productivity was forecast to rise at a 1.2 percent annual pace from January through March. The reports from the Labor Department are due at 8:30 a.m. New York time.

“The growth-inflation cycle has emerged as the driving factor behind bond market sentiment,” Lena Komileva, an economist in London at Tullett Prebon Plc, an inter-dealer broker, wrote in a note today.

Breakeven Rate

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, reflecting the outlook among traders for consumer prices, was 1.91 percentage points, close to the highest since September. The spread averaged 2.23 percentage points over the past five years.

The Federal Reserve is scheduled today to buy U.S. debt maturing from May 2011 to April 2012, its second round of purchases this week, part of a plan to acquire up to $300 billion of the securities to lower consumer borrowing costs.

Fed Chairman Ben S. Bernanke said in congressional testimony yesterday that large budget deficits threaten financial stability. Deficit concerns are already influencing the prices of long-term bonds, he added. Yields climbed last week to the highest level since November.

“His comments highlight the divide among investors currently on whether the steepening of the Treasury yield curve is a positive or a negative factor,” wrote Geoff Kendrick, a London-based analyst at UBS AG in a note today.

Yield Spread

The difference between 2- and 10-year yields was 2.65 percentage points, near the record of 2.76 percentage points reached on May 27. The widening spread indicates investors are demanding more to lend to the government for longer periods because of the threat inflation will pick up and erode the return on bonds’ fixed payments.

The government may borrow a record $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to Goldman Sachs Group Inc., one of the 16 primary dealers that are required to bid at government debt auctions.

The U.S. will probably sell $65 billion of notes next week, compared with $71 billion the last time it sold 3-, 10- and 30- year securities in May, according to Wrightson ICAP LLC, a Jersey City, New Jersey-based research company.

Credit Markets

Central banks’ efforts to revive credit markets are showing some signs of success.

The gap between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 52 basis points, near the lowest level since 2007.

“An increasing number of indicators suggest that the U.S. recession is close to an end, wrote Oslo-based Knut Magnussen, an economist at DnB Nor ASA, Norway’s biggest bank.

Rising Treasury yields have pushed the average rate on a typical 30-year fixed mortgage to 5.35 percent, near the highest since February, according to North Palm Beach, Florida-based Bankrate.com.

South Korea’s National Pension Service, the country’s largest investor, said it will maintain its U.S. government bond holdings even as it cuts the percentage they comprise.

South Korea’s Holdings

“We are planning to reduce the weightings of American Treasuries, but that doesn’t mean we will be selling Treasuries because our fund size is growing,” National Pension said in a statement in response to questions from Bloomberg News. “We don’t have a specific plan to sell Treasuries.”

Investors in South Korea cut their holdings of U.S. debt to $33.1 billion in March, less than half of what they owned in 2006, according to Treasury Department data.

China, the largest foreign owner of Treasuries, increased its stake to a record $767.9 billion in March, the figures show.

There is “no evidence” that China is moving away from holdings of U.S. Treasuries, said James McCormack, head of Asia- Pacific Sovereign Ratings at Fitch, speaking today at a conference in Sydney.

To contact the reporters on this story: Bo Nielsen in Copenhagen at [e-mail]; Wes Goodman in Singapore at [e-mail]
Last Updated: June 4, 2009 06:52 EDT


LINK: http://www.bloomberg.com/apps/news?pid=20601087&sid=aT7GGI5hRtE0