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U.S. Treasuries Gain as Jobless Claims Rise, Inflation Steady

U.S. Treasuries Gain as Jobless Claims Rise, Inflation Steady

March 31 (Bloomberg) -- U.S. Treasury notes rose after first- time claims for unemployment insurance benefits unexpectedly increased and the Federal Reserve's most watched measure of inflation held steady.

The government reports tempered speculation that Fed policy makers will raise the benchmark interest rate either in bigger increments or at each of their six remaining meetings this year. The weekly jobless claims report comes a day before the government releases employment figures for March.

``There are a number of people out there who think there's some upside to the payroll number,'' said Kevin Cronin, who oversees $65 billion as chief investment officer for fixed income at Putnam Investments in Boston. ``Today's number may cast some doubt on that.''

The benchmark 4 percent note maturing in February 2015 rose about 3/8, or $3.75 per $1,000 face amount, to 96 at 11:22 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The yield decreased 4 basis points to 4.51 percent, the lowest since March 22. A basis point is 0.01 percentage point. The yield has fallen for three straight days for the first time since the second week of February.

First-time applications for state unemployment benefits rose to 350,000 last week, the most since the week ended Jan. 8, from 330,000, the Labor Department said. The median estimate of economists surveyed by Bloomberg News was for a drop to 320,000.

The personal consumption expenditures index excluding food and energy gained 1.6 percent in February from a year earlier, the same as in January. Last month, the Fed forecast the core PCE price index will rise 1.5 percent to 2 percent this year. For the month, the index gained 0.2 percent after rising 0.3 percent in January, the biggest increase since December 2002.

`Less Reason'

The Fed has raised its target for the overnight lending rate between banks in seven 25-basis-point increments since June, most recently to 2.75 percent on March 22.

``There's less reason to worry that at the next meeting the Fed will go 50 basis points rather than 25,'' said Jon Blumenfeld, interest-rate strategist at BNP Paribas Securities Corp. in New York. Paribas is one of the 22 primary U.S. government securities dealers that trade with the Fed's New York branch.

The yield on December Eurodollar futures contract fell 6 basis points to 4.25 percent. The futures settle at a three-month lending rate that has averaged 21 basis points above the Fed's target for the past 10 years. The yield is up from 4.03 percent a month ago.

Tomorrow's employment report is expected to show the U.S. created 219,000 jobs in March, after an addition of 262,000 the month before, based on the median forecast of 74 economists. The back-to-back rise would be the strongest since April and May.

Quarterly Loss

Today's gains weren't enough to keep Treasuries from heading for their first quarterly loss in three. The declines pushed the 10-year note's yield up 33 basis points this quarter through yesterday, the most since the three months ended June 30.

Treasury securities have lost 0.74 percent since December, including reinvested interest, the worst of 19 major government debt markets tracked by Merrill Lynch & Co. The firm's index of all sovereign debt is up 0.43 percent this quarter.

``People have begun to wonder whether inflation is under control, and in our view it's not,'' said Alan Yau, who helps manage about $8 billion in bonds at Fiduciary Trust International in London. ``There's nothing to prevent 10-year yields heading to 5 percent.''

The government this month said its consumer price index excluding food and energy rose 2.4 percent in February from a year earlier, the most since August 2002.

Inflation erodes the purchasing power of fixed-income payments. At about 2.2 percentage points, the margin by which 10- year yields as of yesterday exceeded the core consumer price index by the widest since November, a sign investors are more concerned about faster inflation.

Manufacturing

The 10-year note pared some of its gain after the National Association of Purchasing Management-Chicago said its Business Barometer rose to 69.2 in March -- the highest since 1988 -- from 62.7 in February. The median forecast of economists polled by Bloomberg was for a decline to 60.5. Readings higher than 50 indicate expansion.

The Commerce Department also said today personal spending rose 0.5 percent in February, compared with 0.1 percent in January, while incomes gained 0.3 percent.

The 10-year note's yield climbed as high as 4.69 percent on March 24 after Fed policy makers said in a statement two days earlier that ``pressures in inflation have picked up.''

``Concern has shifted toward higher inflation and what that would do to fixed-income returns,'' said Geoff Lunt, part of a team at HSBC Holdings Plc in London that manages $13 billion in bonds. ``The 10-year yield has the potential to rise another 10 to 20 basis points.''

`Relief' Rally

Treasuries may have been poised to rise on any data that wasn't considered too negative for bonds, based on a pattern of trading in futures contracts, said Damien McColough, head of fixed-income research at Westpac Banking Corp. in Sydney.

Hedge fund managers and other large speculators placed record bets in the week ended March 22 on a drop in 10-year note prices, according to U.S. Commodity Futures Commission on March 25.

Speculative short positions, or bets prices will fall, outnumbered long positions by a record 219,385 contracts on the Chicago Board of Trade. Short positions are where an investor sells borrowed securities in the hope of buying them back at a profit when the price falls.

``You got a bit of a relief rally,'' said Raymond Remy, head of fixed-income at Daiwa Securities America Inc. in New York. ``There was some concern'' the data would be bearish for bonds, he said.

Contrary Indicator

The futures figures are sometimes used as a contrary indicator, a sign Treasuries may rise as traders unwind bets against them.

The last time the bet in futures on a decline in the 10-year note was at a record was in the week ended July 13, figures from the trading commission show. Traders pared their bets in the following five weeks, and yields on the 10-year note fell 28 basis points during that time.

``There will continue to be more room for Treasury prices to go up,'' said Takashi Yoshikawa, chief investment officer of Tokio Marine Financial Solutions Ltd., which sells derivatives and structured finance products. The 10-year yield will probably decline to 4 percent by the end of the year, he said.

To contact the reporters on this story:
Elizabeth Stanton in New York at [e-mail]

To contact the editor responsible for this story:
Robert Burgess at [e-mail]


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