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Treasuries Decline Before Data Seen Signaling More Fed QE Cuts

Feb. 3 (Bloomberg) -- Treasuries declined before reports this week on manufacturing and jobs that economists said will show growth is strong enough for the Federal Reserve to further reduce its debt purchases.

Thirty-year bond yields were about three basis points from the lowest level in three months. February started on the opposite tack from January, when tumbling emerging-market currencies boosted demand for the relative safety of U.S. government securities. The rate on benchmark 10-year notes climbed after falling the most last month since August 2011.

“The Fed is relatively confident in the U.S. economy, which means that the taper is on track,” said Patrick Jacq, a fixed-income strategist at BNP Paribas SA in Paris. “If the payrolls data is strong, Treasuries will lose some support, but they will not come under huge selling pressure.”

The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.67 percent at 7:16 a.m. in New York, according to Bloomberg Bond Trader prices, after dropping to 2.64 percent on Jan. 31, the lowest since Nov. 8. The rate fell 38 basis points in January, the steepest monthly decline since August 2011. The 2.75 percent note due in November 2023 fell 7/32, or $2.19 per $1,000 face amount, to 100 22/32.

Thirty-year bond yields also rose two basis points, to 3.62 percent. The rate dropped to as low as 3.59 percent on Jan. 31, the least since Oct. 30.

The Bloomberg U.S. Treasury Bond Index gained 1.8 percent in January, the biggest gain since May 2012, as the Argentine peso led a decline in emerging currencies that also brought down the South African rand and Turkish lira.

Factory Data

The Institute for Supply Management’s factory index fell to 56 in January from 56.5 in December, based on a Bloomberg News survey of economists before the report today. It’s still more than 2013’s average of 53.9 and above the level of 50 that indicates growth.

The U.S. added 180,000 jobs in January, compared with 74,000 in December, a separate survey showed before the Labor Department reports the figure Feb. 7.

An index of non-manufacturing business in China dropped for a third month, according to data today. Growth in Chinese manufacturing slid to a six-month low in January, based on data Feb. 1. While it fell, the gauge runs counter to industry data last month that showed a contraction at the nation’s factories.

The outlook for the U.S. labor market is strong enough that the Fed plans to reduce purchases of Treasuries and mortgage securities to $65 billion from $75 billion this month, it said on Jan. 29, after cutting them in January from $85 billion.

Storms’ Impact

Winter storms in the U.S. will curtail growth in both manufacturing and employment, said Hiroki Shimazu, a Tokyo-based economist at SMBC Nikko Securities Inc., a unit of Japan’s second-largest publicly traded bank.

“For the next two months, the bad weather will push yields down,” Shimazu said. U.S. 10-year borrowing costs may decline to 2.5 percent by the end of February, he said.

Traders increased net long positions in Treasury 30-year bond futures by 20 percent to 68,533 contracts in the week ended Jan. 28 from the previous period, the most bullish position since 2005, according to the Commodity Futures Trading Commission.

Yields will rise by year-end, based on a Bloomberg survey of banks. Ten-year borrowing costs will climb to 3.43 percent, while the rates on bonds due in 30 years will increase to 4.26 percent, based on the responses, with the most recent forecasts given the heaviest weightings.

Thornburg View

Jason Brady, the managing director at Santa Fe, New Mexico- based Thornburg Investment Management, which oversees $95 billion, avoided 10-year Treasuries as yields fell to all-time lows and a soaring stock market slowly sapped demand for government debt. No more.

Even though the Fed is cutting the amount of bonds it buys as the economy improves, Brady said he recently scooped up the securities as yields approached a two-year high of 3 percent.

“With exuberance around risk assets that we saw toward the end of last year, which had every single strategist deciding that stocks were the best thing in the world and bonds were the worst thing in the world and that rates were certainly going higher and anybody who was otherwise is crazy -- that started to be a little much,” Brady said in a Jan. 28 telephone interview.

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