Treasuries Rise the Most in Two Weeks as Service Growth Slows
By Deborah Finestone and Annie Pinkert
Jan. 4 (Bloomberg) -- Treasuries rose the most in two weeks after a private report showed that service industries in the U.S. expanded at a slower pace last month.
Yields on benchmark 10-year notes fell to the lowest in a week as other reports showed Americans claiming first-time unemployment benefits rose last week and pending home sales unexpectedly fell in November.
``The data is leaning a little towards the softer side and the market is managing to improve,'' said David Ader, government bond strategist at RBS Greenwich Capital in Greenwich, Connecticut, one of the 22 primary government security dealers, which trade with the Fed. ``The Fed has been on hold but we think that's going to change.''
Ten-year note yields fell 4 basis points, or 0.04 percentage point, to 4.62 percent at 11:09 a.m. in New York, according to New York-based bond broker Cantor Fitzgerald LP. The price of the 4 5/8 percent note due in November 2016 increased 9/32, or $2.81 cents per $1,000 face amount, to 100 1/32. Bond yields move inversely to prices.
The Institute of Supply Management said its non- manufacturing index, which accounts for almost 90 percent of the economy, decreased to 57.1 in December, from 58.9 the previous month. A reading above 50 indicates growth. The median forecast in a Bloomberg survey of economists was for a reading of 57.
``The numbers on the whole were benign to marginally positive for Treasuries,'' said John Canavan, a fixed-income analyst at Stone & McCarthy Research in Princeton, New Jersey.
The Labor Department may tomorrow say the U.S. economy added 105,000 jobs last month, compared with 132,000 in November, a separate survey showed. That would complete the slowest quarter of job gains in three years.
Revised Expectations
Economists were earlier forecasting an addition of 115,000 jobs for December, according to the Bloomberg survey, but reduced their predictions after ADP Employer Services yesterday said U.S. companies shed 40,000 positions last month, the first loss in jobs since April 2003.
Traders and investors expect U.S. employers added 82,200 non-farm workers in December, according to an auction of economic derivatives by the Chicago Mercantile Exchange.
The anticipated gain has fallen from 112,900 new jobs in an earlier CME auction yesterday. The CME released the figures on its Web site.
Weekly Claims
More Americans filed first-time claims for unemployment compensation last week, the Labor Department said today, adding to evidence the labor market was slowing at the end of 2006.
Initial jobless claims rose 10,000 to 329,000 in the week ended Dec. 30, the second-highest weekly figure since July. The four-week moving average, a less volatile measure, rose to 317,500 from 316,250. Weekly claims figures were also distorted by seasonal adjustments associated with the holiday season, a Labor Department spokesman said.
``It's another piece of the puzzle that works in the favor of those that are bullish'' on bonds, said George Adell, a fixed- income strategist for Philadelphia-based Commerce Capital Markets Inc.
Interest-rate futures based on March contracts indicate traders see an 18 percent chance the Fed will reduce its key rate to 5 percent at its March 21 policy meeting. A rate cut at the meeting was fully priced in a month ago.
Policy makers left their overnight lending rate between banks at 5.25 percent for the fourth time when they met Dec. 12. Minutes from that meeting showed one argued that the Fed should have stated rates were just as likely to be cut as increased. The minutes didn't identify the policy makers.
Oil Prices
Declining oil prices also reduced inflation risks, boosting bonds. Crude fell as much as $56.48 a barrel on the New York Mercantile Exchange, the lowest since Nov. 17, as warm U.S. weather curbs fuel consumption.
``A collapse in commodities is a net positive for Treasuries,'' said William O'Donnell, head of interest-rate strategy in Stamford, Connecticut, for primary dealer UBS Securities LLC. ``To the extent inflation expectations diminish further, it lowers the bar for a Fed rate cut.''
Long-term inflation expectations fell to the lowest in a week. The yield on the 10-year inflation-protected Treasury was 2.27 percentage points below the yield on the regular 10-year note.
The gap, called he break-even inflation rate, represents the average rate of inflation over the life of the securities. It peaked in May at 2.74 percent, and touched a 17-month low of 2.26 percent on Dec. 27.
The National Association of Realtors said contracts to buy previously owned homes in the U.S. unexpectedly fell 0.5 percent in November after a revised 1.5 percent drop in October. The median estimate of 16 economists surveyed by Bloomberg News was for a 0.8 percent rise.
The Commerce Department said orders placed with U.S. factories rose 0.9 percent in November, after falling a revised 4.5 percent the previous month. A separate Bloomberg survey showed the median estimate of economists was for a 1.3 percent gain.
