Tuesday, July 2, 2013

Treasuries in tightest range in 2 weeks as factory jobs decline

By Susanne Walker

Treasuries traded in the narrowest range in almost two weeks as a measure of U.S. factory employment dropped last month to the lowest in almost four years, even as manufacturing rebounded.

Benchmark 10-year note yields erased an earlier gain after an Institute for Supply Management report showed factory employment dropped to 48.7, the lowest since September 2009, from 50.1. U.S. government securities handed investors a loss of 2.5% in the first six months of 2013, the biggest decline since the first half of 2009, according to Bank of America Merrill Lynch data. A Labor Department report July 5 is forecast to show the U.S. added 165,000 jobs.

“People are risk averse right now,” said Tom Porcelli, chief U.S. economist at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade with the Federal Reserve. “If you look at this report in its entirety, you come away with the conclusion that it’s a mixed report -- employment slipped.”

The benchmark 10-year yield was little changed at 2.49% at 2:29 p.m. New York time, according to Bloomberg Bond Trader prices. It earlier rose six basis points, or 0.06 percentage point. The price of the 1.75% note due in May 2023 was 93 1/2.

The yield traded in a 7.8 basis-point range, the narrowest since June 18.

Even after recent increases, the Treasury 10-year yield is still about a percentage point below its decade average of 3.56%.

Treasury Volatility

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index closed at 97.13 on June 27, down from 110.98 on June 24, the highest since November 2011.

The Fed is buying $85 billion of Treasuries and mortgage- backed securities each month to support the economy by putting downward pressure on borrowing costs, including $3.14 billion in Treasuries today maturing between August 2020 and May 2023, according to the New York Fed’s Website.

Bernanke said on June 19 the central bank could reduce its monthly purchases if the employment outlook shows sustained improvement. U.S. employers added workers last month, a survey showed before the Labor Department data this week, after hiring 175,000 in May.

Bond Outflows

“Friday’s data will be the apex of this week,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The economic numbers are still not amazingly strong.”

The ISM’s manufacturing index climbed to a three-month high of 50.9 from 49 in May, the Tempe, Arizona-based group said today. The median forecast of 85 economists surveyed by Bloomberg called for the measure to rise to 50.5. A reading of 50 is the dividing line between expansion and contraction.

Investors who poured $1.26 trillion into bond funds in the past six years pulled out record amounts of cash last month, leaving the world’s biggest fixed-income managers struggling to stem the flow.

The funds saw $61.7 billion of withdrawals as money market mutual-fund assets rose $8.17 billion in the week ended June 25, according to TrimTabs Investment Research and the Money Fund Report.

Bank of America Merrill Lynch’s Global Broad Market Index dropped 2.9% in the past two months, the most since the inception of the daily gauge in 1996, as Bernanke laid out possibilities for reducing the $85 billion in monthly bond purchases supporting the economy.

‘Inflection Point’

Market bears say losses are just getting started because yields barely exceed inflation, leaving little relative value in bonds as the global economy improves. Pacific Investment Management Co., BlackRock Inc. and DoubleLine Capital LP, which together oversee about $6 trillion in assets, said the worst is already over because the securities are fairly valued.

“We are at a definite inflection point,” Richard Schlanger, who helps invest $20 billion in fixed-income securities as a vice president at Pioneer Investments in Boston, said in an interview on June 28. “If this thing continues in this vein, people are going to throw in the towel and you’re going to get this pain trade. And the markets can’t take it. They’d rather see a gradual rise in short-term rates versus a precipitous rise.”

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