Treasury 10-Year Yield Reaches a Nine-Month High as Recovery Builds Steam

Treasuries tumbled, pushing 10-year yields to the highest since May, as an unexpected drop in the jobless rate and data showing growth by factories and service industries fueled bets the economic recovery is gaining steam.

Thirty-year yields had the biggest weekly increase since October as manufacturing also accelerated in Europe and China, making higher-yielding assets more attractive. The gap between U.S. 2- and 10-year yields reached the widest in almost a year as U.S. employers added jobs for a fourth month. The Treasury will auction $72 billion in notes and bonds next week.

“In context with the other data we’ve seen, the employment number is consistent with the idea of recovery -- net net, it’s taken as a bearish signal,” said Carl Lantz, head of interest- rate strategy in New York at Credit Suisse Group AG, one of 20 primary dealers that trade with the Federal Reserve. “The market probably won’t be able to catch its breath until we get through the auction process. Demand will be fairly strong.”

The benchmark 10-year note yield climbed 31 basis points to 3.63 percent yesterday in New York, from 3.32 percent on Jan. 28, according to BGCantor Market Data. It was the biggest weekly gain since Dec. 10. A basis point is 0.01 percentage point. The yield touched 3.66 percent yesterday, the highest since May 4.

The price of the 2.625 percent security maturing in November 2020 dropped 2 15/32, or $24.69 per $1,000 face amount, to 91 3/4.

Thirty-year bond yields advanced 20 basis points to 4.73 percent, the biggest jump since the five days ended Oct. 15. They touched 4.74 percent yesterday, the highest level since April 15. Two-year yields increased 21 basis points to reach 0.74 percent in the biggest rise since June 5, 2009.

Yield Spread

The yield gap between 2- and 10-year Treasuries widened to as much as 291 basis points, the most since Feb. 23, 2010.

Treasuries fell yesterday as the jobless rate decreased for a second month, Labor Department data showed. A Bloomberg survey had forecast it would rise to 9.5 percent, from 9.4 percent in December. Employers added 36,000 jobs, less than predicted, as storms swept the nation. It was the smallest increase in four months, the data showed.

“The weather distortions are so great that it’s hard to really extract any information about the strength of the labor market,” Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York, said yesterday.

Growth in Services

The jobs report came a day after data from the Institute for Supply Management showed U.S. service industries, which account for 90 percent of the U.S. economy, grew in January at the fastest pace since 2005. The ISM’s index of non- manufacturing businesses rose to 59.4, from December’s 57.1, the Tempe, Arizona-based group said.

A separate ISM factory index for the U.S. increased last month the most since 2004, the Tempe, Arizona-based group said on Feb. 1. Manufacturing in the 17-nation euro region, the U.K. and China also expanded, other reports that day showed.

Treasuries have lost 1.2 percent this year, according the Bank of America Merrill Lynch Treasury Master index. The Standard & Poor’s 500 Index has gained 4.2 percent.

“The overall tone of economic data has been positive, and the market has been acknowledging that,” said Thomas Simons, a government-debt economist in New York at primary dealer Jefferies Group Inc. “It’s still not a tremendously satisfying pace of recovery, but things are moving right along.”

Not Enough Growth

The Fed is unlikely to raise interest rates for at least 12 months because the U.S. economy isn’t generating enough growth to lower unemployment, Pacific Investment Management Co.’sBill Gross said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene.

The central bank would probably like to see the economy adding at least 200,000 jobs a month before considering rate increases, said Newport Beach, California-based Gross, manager of the world’s biggest bond fund. Policy makers have held the benchmark interest rate near zero since December 2008.

Fed Chairman Ben S. Bernanke said in a speech on Feb. 3 in Washington the nation needs to see faster job growth for a sufficient time before policy makers can be assured the economic recovery has taken hold.

The central bank bought $27.8 billion in U.S. debt this week, part of a $600 billion program to spur the economy. While Bernanke said in his speech that growth will pick up this year and the Fed’s purchases of Treasuries are “providing significant support to job creation and the economy,” he gave no indication whether he’ll maintain or adjust monetary stimulus after the asset buying-program ends in June.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.36 percentage points from a 2010 low of 1.47 in August.

The Treasury will auction $32 billion of 3-year notes, $24 billion of 10-year debt and $16 billion of 30-year bonds next week in daily sales that begin Feb. 8.