By Cordell Eddings and Anna Rascouet
(Bloomberg) – Treasuries fell as a private-sector report showed U.S. companies cut the fewest jobs last month in two years and the government said it will sell a record-tying $81 billion in notes and bonds next week.
The declines drove the yield on the 10-year note to within one basis point of its highest level in two weeks as ADP Employer Services said companies cut an estimated 22,000 jobs in January after a revised 61,000 the previous month. The report comes two days before the U.S. issues its employment data for January. The Treasury Department also said there’s no need for more increases in auction sizes.
“Yields are still higher in large part because of the strong fundamental news from the ADP report that points to more positive jobs data coming later this week,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers that trade with the Federal Reserve. “The market did rally some after the Treasury announcement, but the move was muted because the announcement must be taken relative to expectations.”
The 10-year note yield climbed four basis points to 3.69 percent as of 9:54 a.m. in New York, according to BGCantor Market Data. It came close to the Jan. 28 level, the highest in more than a week. The 3.375 percent security due in November 2019 fell 11/32, or $3.44 per $1,000 face amount, to 97 15/32.
The yield on the benchmark note will rise to 4.13 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

‘Sufficient Flexibility’

The Treasury, in its quarterly refunding announcement today, said it will sell a record-matching $40 billion in three- year notes, $25 billion of 10-year debt and $16 billion in 30- year bonds next week. The sales will be held over three days starting Feb. 9. The totals matched the average estimates of eight primary dealers.
The government “now believes that the current auction calendar provides debt managers with sufficient flexibility to address a range of expected borrowing needs,” said Matthew Rutherford, the Treasury’s deputy assistant secretary for federal finance, according to minutes of an advisory committee meeting yesterday.
The Treasury also said it is considering more frequent auctions of Treasury Inflation Protected Securities, or TIPS, to improve liquidity in this market. One possible addition is a second reopening of 10-year TIPS, which would start in July if implemented, the department said.

‘Show Support’

“The Treasury continues to show support to growing the TIPS program and increasing liquidity,” Barclays’s Pond said. “The most important thing the Treasury can do is show support to the program. Their commitment is likely to draw in new investors and dealers to TIPS.”
Another report today may show service industries in the U.S. expanded at the fastest in 20 months. The Institute for Supply Management’s index of non-manufacturing companies, which comprise almost 90 percent of the economy, rose to 51 in January, the most since May 2008, a Bloomberg survey of economists shows. The data is due at 10 a.m. New York time.
The U.S. will say Feb. 5 that nonfarm payrolls rose by 13,000 in January, according to the median estimate of 80 economists surveyed by Bloomberg survey. Employers added 4,000 jobs in November, the first increase since December 2007.

‘Shift From January’

An increase in Treasury yields marks a shift from January, when investors sought the relative safety of Treasuries as stocks fell. U.S. government securities returned 1.6 percent last month, according to Bank of America Corp.’s Merrill Lynch unit. The Standard & Poor’s 500 Index fell 3.7 percent for the month, the most since February 2009, Bloomberg data show.
Mohamed A. El-Erian, whose company runs the world’s biggest mutual fund, said the stock-market decline may worsen amid persistent U.S. joblessness and economic growth that trails analysts’ forecasts.
Treasuries indicate traders are adding to bets that inflation will accelerate as the economy revives. The difference between yields on 10-year notes and comparable TIPS, a gauge of trader expectations for consumer prices, widened to 2.39 percentage points from 2.06 percentage points three months ago.

U.S. Marketable Debt

President Barack Obama has increased the U.S. marketable debt to a record $7.27 trillion as he tries to sustain the economic recovery from last year’s recession. He projects the U.S. budget deficit will rise to a record $1.6 trillion.
U.S. economic growth will slow to 2.7 percent in the first quarter of 2010 from 5.7 percent in the final three months of last year, Bloomberg surveys of economists show.
Moody’s Investors Service Inc. said the U.S. government’s Aaa bond rating will come under pressure unless measures are taken to reduce budget deficits projected for the next decade.
The ratios of government debt to U.S. gross domestic product and revenue have increased “sharply” during the credit crisis and recession, and Moody’s expects them to remain higher compared with other Aaa-rated countries, the New York-based ratings company said yesterday.
Merrill Lynch’s MOVE Index, an options-based gauge for price swings, fell to 83.7, the lowest level since Nov. 25, the day before the U.S. Thanksgiving holiday. The last time it was lower before that was October 2007.

–With assistance from Susanne Walker in New York. Editors: Greg Storey, Dave Liedtka

To contact the reporters on this story: Cordell Eddings in New York at +1-212-617-7344 or ceddings@bloomberg.net; Anna Rascouet in London at +44-20-7073-3844 or arascouet@bloomberg.net

To contact the editor responsible for this story: David Liedtka at +1-212-617-8988 or dliedtka@bloomberg.net

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