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Treasury Volatility Drops to One-Year Low Amid Uneven U.S. Data

July 2 (Bloomberg) -- Treasury market volatility was at the lowest level in more than a year before data today that will signal an uneven recovery in the U.S. economy, according to analysts’ forecasts.

Benchmark 10-year notes were little changed before reports economists said will show hiring at U.S. companies accelerated in June and factory orders declined for the first time in four months in May. The yield difference, or spread, between 10-year Treasuries and similar-maturity German bunds was about one basis point from the widest since 1999 as central bank policy diverges. Federal Reserve Chair Janet Yellen is scheduled to speak in Washington today.

“We’re bumbling along with low volatility and people don’t really know which way it’s going,” said Peter Osler, head of rates strategy at Marex Spectron Group Ltd. in London. “The positioning in those markets seems to be totally flat.”

The benchmark 10-year yield was at 2.56 percent at 7:15 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 2.5 percent note due in May 2024 was 99 17/32. The average rate for the past decade is 3.41 percent.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, declined to 52.74 basis points on June 30, the lowest closing level since May 9, 2013. The gauge has dropped from last year’s high of 117.89 basis points reached on July 5.

Labor Data

Companies in the U.S. added 205,000 workers, versus 179,000 in May, according to a Bloomberg survey before ADP Research Institute reports the figure today. For tomorrow’s U.S. jobs report, a separate Bloomberg survey projects employers added 215,000 positions, compared with 217,000 in May. That would be the fifth month of an increase of more than 200,000 jobs.

“Yields are a little too low,” said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings Inc. in Tokyo. “As these job numbers stay on course or get stronger, I don’t think inflation is too far behind. The Fed’s going to be forced to hike.”

An increase of 275,000 or more in tomorrow’s data would push up 10-year yields to about 2.70 percent, Nomura’s Gorman said.

The extra yield that 10-year Treasuries offer over similar- maturity German bunds was at 131 basis points, from 132 basis points yesterday, the most since June 1999 based on closing prices, amid rising speculation the Fed will increase interest rates next year. By contrast, the European Central Bank unveiled a package of stimulus measures last month to combat low inflation and high unemployment in the region.

‘Extreme Levels’

“The 10-year Treasury-bund spread is at extreme levels,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “We expect this spread to widen, based on the expected divergence in growth and inflation and on the notion that the Fed is moving towards a first rate hike whereas the ECB is considering further stimulus.”

Traders see about a 54 percent chance the Fed will increase its benchmark rate to at least 0.5 percent by July next year, up from 43.2 percent odds at the end of May, fed funds futures show.

Yellen is scheduled to speak at the International Monetary Fund in Washington at 11 a.m. local time. IMF Managing Director Christine Lagarde and Michel Camdessus, the former managing director, are also due to speak.

The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was little changed today at 2.24 percentage points. The average for the past decade is 2.20.

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