U.S. Treasuries declined, pushing the yield on the benchmark 10-year note up from a five-week low, after the employment portion of a manufacturing index rose to the highest since 1987.
``There's little incentive to buy Treasury notes at these yields,'' said Michael Kastner, who helps manage $12 billion in bonds at Deutsche Bank Private Banking in New York. ``Today's numbers were positive for the economy.''
The benchmark 4 percent note maturing in February 2014 fell 1/4, or $2.50 per $1,000 face amount, to 99 31/32 at 11:45 a.m. in New York, according to Deutsche Bank AG. Its yield rose 3 basis points, or 0.03 percentage point, to 4 percent. Friday's closing yield of 3.97 percent was the lowest since Jan. 22.
Investors such as Kastner are concerned a rise in hiring may cause consumers to increase spending, finally sparking inflation. Slow inflation has helped keep Treasury note yields low even as the economy has accelerated. Faster inflation erodes the value of fixed-income payments over time.
``Overall sentiment in the market is that yields are going to go higher,'' said James Caron, fixed income strategist at Merrill Lynch & Co., one of the 23 primary U.S. government securities dealers that trade with the Federal Reserve Bank of New York. He said the yield on the 10-year note may range from 3.97 percent to 4.1 percent.
The Institute for Supply Management's February manufacturing index eased to 61.4 from 63.6 the previous month. The January reading was the highest since December 1983. The employment index rose to 56.3 -- the highest since 1987 -- from 52.9, while the prices paid index jumped to 81.5 from 75.5.
`Huge Jump'
``It was a huge jump,'' Deutsche Bank's Kastner said of the gains in the employment and prices paid indexes. ``Despite the consensus that inflation is not a problem, we are seeing some signs of a pick up in prices.''
Ried, Thunberg & Co.'s weekly index of sentiment toward the 10-year Treasury note was at 46 on Friday, from 45 a week earlier. A reading below 50 shows the 37 international investors surveyed by the Westport, Connecticut-based research firm, who manage $140 billion, expect the note's price to decline by the end of March.
The ISM index comes in the same week that the government may say job growth is increasing. A Labor Department report on Friday will likely show the economy added 125,000 jobs last month, compared with 112,000 in January, according to the median forecast of 52 economists in a separate survey. The economy hasn't created more than 100,000 jobs for two consecutive months since 2000, when the Federal Reserve last raised its target interest rate.
Employment Report
``A good number on Friday will define a higher rate environment for March,'' said Robert Podorefsky, chief interest- rate strategist at FleetBoston Financial Corp. in Boston. A payroll increase higher than 200,000 could push yields back to late January levels, when the 10-year note yield reached 4.26 percent, he said.
Outside of manufacturing, there is little sign inflation is accelerating, which would allowing Fed policy makers to keep their target interest rate at 1 percent trough the third quarter.
A government report today showed the core personal consumption expenditures index for January rose by 0.1 percent, compared with a 0.2 percent gain in December. The index is Fed Chairman Alan Greenspan's preferred measure of inflation.
The difference between the yield on the note and the Fed's target interest rate for overnight loans between banks is 3 percentage points, above the average for the past 10 years of 1.29 percentage points. The note is a benchmark for such consumer borrowing rates as those on mortgages.
Inflation is `Nothing'
``Employments costs and income are the main drivers of inflation in the short run, and a 0.2 percent rise in income is nothing,'' said David Boberski, head of interest-rate strategy at Bear Stearns & Co. in New York, another primary dealer. ``These numbers will keep yields at the lower end of their range with the 10-year just below 4 percent.''
Today, the Commerce Department said personal spending rose 0.4 percent in January, while personal incomes increased 0.2 percent. The median estimate of economists surveyed by Bloomberg News was for a gain of 0.3 percent in spending and rise of 0.5 percent for incomes.
Interest-rate futures show investors have been scaling back expectations for when the Fed will raise interest rates. The September Eurodollar futures contract yielded 1.43 percent, down from 1.695 percent at the end of January. Eurodollar futures are indications of a three-month lending rate that has averaged 24 basis points above the Fed's target rate the past 10 years.
Bets on Treasuries in the futures market show hedge funds and other large speculators have their highest expectations in eight months that prices will rise, which may limit additional gains, said analysts such as Anthony Crescenzi, chief bond market strategist at Miller Tabak & Co. in New York.
So-called net long positions in 10-year Treasury futures, representing net bets on gains in the note, rose to about 53,000 contracts last week, Commodity Futures Trading Commission released Friday showed. The figure is the most since June, just before the yield on the 10-year note rose to 4.56 percent from 3.11 percent within a span of two months.
To contact the reporter on this story:
Lianne Gutcher in London at lgutcher@bloomberg.net and Vivianne C. Rodrigues in New York, or at vrodrigues@bloomberg.net.
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