Treasuries Gain as ADP Unexpectedly Says Companies Reduced Jobs

Treasuries rose as a report showed companies in the U.S. unexpectedly eliminated jobs in March, encouraging demand for the safety of government debt.

The 10-year note’s yield dropped from almost the highest level since June on evidence the recovery in the labor market will be slow. The government’s payrolls report on April 2 is forecast to show employers added the most jobs since March 2007.

“We are rallying on the back of the release,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers that trade directly with the Federal Reserve. “Investors expected a strong employment number at the end of the week and were looking to ADP as the leading indicator.”

The 10-year note’s yield fell 3 basis points, or 0.03 percentage point, to 3.83 percent at 2:19 p.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2020 increased 1/4, or $2.50 per $1,000 face amount, to 98 11/32. The yield touched 3.92 percent on March 25, the highest level since June 11.

Companies cut an estimated 23,000 jobs this month after eliminating 24,000 in February, ADP Employer Services reported. The median forecast of 35 economists in a Bloomberg News survey was for an increase of 40,000 positions.

“A weak ADP caught people by surprise,” said Brian Edmonds, head of interest rates at the primary dealer Cantor Fitzgerald LP in New York. “To have it that weak is eye-opening for the market and for the nonfarm payrolls number on Friday.”

Jefferies View

Investors should sell 10-year notes at yields from 3.77 percent to 3.805 percent, John Spinello, chief technical strategist in New York at the primary dealer Jefferies Group Inc., wrote in a research note today. The market may see a rally if the nonfarm payrolls number is weaker than anticipated, Spinello said in an interview.

The Labor Department will report that employers added 184,000 jobs, according to the median forecast of 81 economists in a Bloomberg survey. The jobless rate probably held at 9.7 percent, according to analysts.

Treasuries have returned 0.9 percent for investors in the first quarter as of yesterday, according to an index compiled by Bank of America Corp.’s Merrill Lynch unit. They have lost 1.1 percent this month.

Atlanta Fed President Dennis Lockhart said he would like to see evidence of recovery in the job market before he supports an increase in the benchmark interest rate from a record low.

‘Looking for Signs’

“I will be looking for signs that employment gains are likely to repeat, accumulate and, once achieved, are likely to be durable,” Lockhart said today in a speech in Hartford, Connecticut. “It is premature to assume an imminent reversal of the Fed’s accommodative policy.”

Interest-rate futures on the CME Group Inc. exchange showed a 44 percent chance that U.S. policy makers will raise the fed funds target by at least a quarter-percentage point by September, compared with 47 percent odds yesterday.

The Fed has kept its target rate for overnight lending in a range of zero to 0.25 percent since December 2008. The central bank is ending today its purchases of $1.25 trillion of mortgage securities and $172 billion of agency debt. It ceased buying Treasuries in October after acquiring $300 billion.

Treasury 10-year note yields have increased 22 basis points this month in the biggest advance since December on speculation the central bank will begin to raise interest rates while the administration of President Barack Obama tries to sustain economic growth with record borrowing.

U.S. Budget Deficit

The budget deficit, which rose to $1.4 trillion in fiscal 2009, will drive Treasury sales to a record $2.43 trillion this year, a February survey of bond-trading companies showed.

Dallas Fed President Richard Fisher said yesterday in Tucson, Arizona, that the U.S. can’t “turn a blind eye” to the effect that the growing federal deficit is having on Treasury yields and the outlook of investors.

The Treasury is scheduled to announce tomorrow it will sell $40 billion in 3-year notes, $21 billion in 10-year notes, $13 billion in 30-year bonds and $8.2 billion in 10-year Treasury Inflation Protected Securities in auctions next week, according to the average forecast of nine primary dealers surveyed by Bloomberg News. The auctions begin April 5.

Treasury 10-year note yields rose last week the most since December as lower-than-average demand at $118 billion in note auctions raised concern that investor interest is waning.

“While the bull market in bonds may have run its course, I would be surprised to see it listed in the obituary section in the newspapers,” Kevin Giddis, head of fixed-income sales, trading and research at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “The rest of the world is not secure, and the likelihood of another debt crisis is high.”

China May Let Yuan Strengthen Next Month

China may allow its currency to trade freely next month, helping to counter criticism it’s giving its exporters an unfair advantage, said Stephen Jen of BlueGold Capital Management LLP.

“I maintain the view that it is likely that China refloats the renminbi in April,” before a meeting of U.S. and Chinese officials in Beijing, Jen, a managing director at BlueGold in London, wrote in a report to clients today.

Officials in Beijing have resisted allowing gains in the yuan, having controlled its value since July 2008 after it strengthened 21 percent against the dollar in the previous three years. The status quo has drawn criticism from European and U.S. policy makers, who say keeping the currency undervalued has given China’s exporters an edge and is inflating asset bubbles.

Allowing the yuan to gain “should help diffuse much of the risks associated with trade protectionism and allow China to resume building the institutional framework necessary to conduct monetary policies independent from those of the Fed,” said Jen, a former chief currency strategist at Morgan Stanley.

Chinese and U.S. policy makers including U.S. Treasury Secretary Timothy F. Geithner are scheduled to attend a Beijing summit in May, while Geithner’s department is preparing to release its twice yearly currency-market report next month.

The last time the Chinese government revalued the yuan, or renminbi, was on July 21, 2005, when it dropped its currency peg, letting it appreciate 2.1 percent to 8.11 per dollar.

Israel’s Fischer Raises Key Rate for Fourth Time

The Bank of Israel raised its benchmark interest rate for the fourth time since August as inflation expectations increased and the economy expanded.

Governor Stanley Fischer raised the rate by a quarter point to 1.50 percent, the Jerusalem-based central bank said today. Economists were split on whether the bank would tighten credit today with six surveyed by Bloomberg predicting the decision and eight expecting no change.

“Raising the rate now broadcasts a determined message in the face of the recent increase in inflation expectations and will prevent unnecessary increases in the future,” said Rafael Gozlan, chief economist at Tel Aviv-based Leader Capital Markets Ltd., who predicted the rise.

Economic growth accelerated to an annualized 4.9 percent in the fourth quarter from 3.6 percent in the previous three months. The spread between 2013 fixed-rate bonds and inflation- linked bonds with a similar maturity has widened by about 30 basis points this month, indicating that investors are expecting inflation to accelerate.

“The current increase is made against the background of growth that continues to become more firmly based, inflation expectations that are close to the upper limit of the target inflation range, and the rise in asset prices,” the Bank of Israel said in an e-mailed statement today.

The benchmark Mimshal Shiklit note due February 2019 fell 0.02 shekel to 108.95 at the close in Tel Aviv and prior to the release of the decision. The yield on the 6 percent security rose one basis point to 4.81 percent, the highest since Feb. 24. The Tel Aviv Stock Exchange is closed Monday and Tuesday for the Passover holiday. The shekel last traded at 3.7365 to the dollar on March 26.

Economic Recovery

Fischer had held the rate since the end of December after increasing it by a quarter-point three times as the economy recovered from the global crisis.

“Most indicators suggest that economic activity continued to expand in the first quarter of 2010, but it seems likely that the rate of increase will be lower than that in the previous quarter,” the bank’s statement said.

The interest rate increase isn’t likely to trigger a significant reaction in the currency or bond market, said Inon Dafni, an economist at Israel Discount Bank Ltd., the country’s third largest lender.

“I don’t expect any real surprise for the bond market as yields were pricing in an interest rate hike,” he said. “The shekel may strengthen, but still there is no major shock here.”

Forecasters on average are expecting the benchmark interest rate to increase to 2.9 percent 12 months from now, the central bank statement said.

Target Range

Inflation expectations for the coming year have risen to 2.9 percent, close to the ceiling of the government’s target range, Alon Katz, head of research at Maor-Luski Investment House in Tel Aviv, said. For the following year, expected inflation is 3.2 percent, he said. The government target for annual inflation is 1 percent to 3 percent.

Bank Leumi Le-Israel Ltd., the country’s largest lender, raised its growth forecast for the year to 3.8 percent from a previous 3.5 percent on March 25.

“The market is signaling to Fischer: Hey, we are concerned about inflation,” Katz said prior to the announcement. “The market had anticipated that he would raise in May or in June. Raising it a month earlier is an important signal. He is saying: ‘I can see what you are afraid of and I’m not going to let it happen.’”

Israel’s benchmark TA-25 stock index surged 75 percent last year, led by Delek Group Ltd., a partner in a gas find at the Tamar field off Haifa’s coast last year. The index has gained about 7.5 percent since the beginning of the year.

Fischer was appointed to a second term on March 17. One of his tasks in the new term will be to implement a new law governing the central bank that calls for the creation of a six- member Monetary Policy Committee. Currently, Fischer has sole responsibility for setting rates.

Canadian Dollar Depreciates Amid Bets Rally Can’t Be Sustained

The Canadian dollar posted its first five-day loss this month amid speculation the rally that pushed the currency to its strongest level against the greenback in almost 20 months could not be sustained.

Canada’s currency, known as the loonie, depreciated against the euro yesterday after European leaders endorsed a plan to assist Greece through a mix of International Monetary Fund and bilateral loans. Bank of Canada Governor Mark Carney signaled the central bank may raise interest rates as soon as June. The nation’s economy grew 0.5 percent in January, according to the median estimate in a Bloomberg survey before a March 31 report.

“The race to parity has taken a pause in the Canadian dollar,” said Kathy Lien, director of currency research at the online currency trader GFT Forex in New York. “Whenever we see an improvement in risk appetite it seems to be more Canada- positive, but this week we didn’t see it participating.”

The currency declined 0.9 percent to C$1.0266 per U.S. dollar yesterday in Toronto, from C$1.0173 on March 19. One Canadian dollar purchases 97.41 U.S. cents. For the week, the Canadian currency fell against 9 of its 16 most-traded counterparts.

The loonie headed for a quarterly gain of 2.6, the second- best performance against the greenback after the Mexican peso.

Crude oil, the nation’s biggest export, fell for a third week, losing 0.7 percent.

‘Expressly Conditional’

The currency reached C$1.0062 on March 19, the strongest level since July 23, 2008, after a report showed consumer prices gained more than forecast in February, driving speculation the Bank of Canada will raise benchmark interest rates before the U.S. Federal Reserve.

The loonie gained March 25 as Carney said in a speech in Ottawa that the bank’s pledge to keep borrowing costs at a record low 0.25 percent through June was “expressly conditional” on the outlook for prices, strengthening earlier language.

The speech “helped firm sentiment that had already been building,” said David Watt, senior currency strategist in Toronto at Royal Bank of Canada. “He was actually not beating back expectations of possibly an early move. He really didn’t express discomfort with the Canadian dollar other than what they’d basically said before and here we are flirting with parity.”

Fiscal Crisis

Canada’s economy expanded at a rate of 0.5 percent in January, a Statistics Canada report is expected to show on Tuesday March 30, according the estimate of 18 economists surveyed by Bloomberg. The nation’s economy grew at a 5 percent annualized rate in the fourth quarter, faster than predicted by the Bank of Canada and the fastest pace since the third quarter of 2000.

Government bonds fell, pushing the yield on Canada’s two- year benchmark up five basis points to 1.69 percent. The 10-year security yield jumped eight basis points to 3.56 percent.

The Canadian dollar has gained 9.6 percent against the euro this year amid concern that Greece’s fiscal crisis will spread to other European nations, damping the region’s growth.

The euro yesterday rose from a more than two-year low against the loonie after European Central Bank President Jean- Claude Trichet blunted criticism of IMF involvement in a rescue plan for Greece, whose budget deficit is more than four times the EU’s limit.

Fitch Ratings cut Portugal’s credit grade on March 24, renewing concern Greece’s fiscal crisis may spread to other European nations.

Five-Year Plan

“Looking at how well Canada has done on a relative basis, it’s because it’s in a much better fiscal situation,” said Sacha Tihanyi, a currency strategist in Toronto at Bank of Nova Scotia.

Canadian Finance Minister Jim Flaherty on March 4 announced a five-year spending plan with cuts to defense, international aid and government operations in a bid to be the first Group of Seven country to erase its deficit after the global financial crisis. He predicted a shortfall narrowing to C$49.2 billion ($47.9 billion) in the 2010-11 fiscal year, down from a record C$53.8 billion last year.

All G-7 countries but Canada and Germany will have debt-to- GDP ratios near or exceeding 100 percent by 2014, John Lipsky, first deputy managing director of the IMF, said on March 21.

Speculative net long positions -- bets that the Canadian currency will rise versus bets that it will fall -- increased to 73,027 contacts on March 23, the most since October 2007, compared with net longs of 69,640 contacts a week earlier, according to data from the Commodity Futures Trading Commission in Washington.