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US Yield Curve Narrows as Inflation Slows before Jobs Report

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US Yield Curve Narrows as Inflation Slows before Jobs Report.

Between Treasury 5-year notes and 30-year bonds the difference narrowed to nearly the least in six years while signs of the global inflation slowing added to some attraction of longer-term debt.

The gap, which is called the yield curve, narrowed to 1.39% points while third quarter unit labor costs dropped 1%. As shown in a report, this suggests there is little pressure on wages. Also in the government’s December 5 report on employment fewer jobs are being added by US companies than forecasted. Putting a damper on the outlook for inflation is Brent crude which traded at roughly $70 per barrel, down 36% this year.

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As stated by Thomas Simons, a government debt economist with New York-based Jefferies LLC and one of the 22 primary 22 dealers trading with the Federal Reserve, pressures on general wages are actually low and not building. At this point, everyone is being cautious and there are no signs of inflation.

Adding one basis point or 0.01% points to 2.31% was the benchmark 10-year yield. Data from Bloomberg Bond Trader also showed the price of the 2.25% note that will mature in November 2014 was 99 1/2.

At its lowest in three years was the 10-year breakeven rate, used to measure expectations for inflation. The difference between yield on 10-year notes and similar maturity TIPS fell to 1.78% points.

Although jobs are being added in the US, inflation is remaining in check because of slow income growth. The employment report for this week revealed that average hourly earnings in the US climbed in November 2.1% from this same time last year. This year, the number has averaged 2%, not able to recover from the recession that started in December 2007 and ended in June 2009. In 2008, the number reached as high as 3.6%.

Today, a report showed that unit labor costs declined more than the 0.2% forecast in a survey by Bloomberg News.

Last month, 208,000 workers were hired by US companies, statistics compiled by ADP Research Institute in New Jersey. Of the 47 economist surveyed by Bloomberg, the median forecast called for 222,000 workers. In addition, over the last eight consecutive months, payrolls have increased by a minimum of 200,000.

Last month, 230,000 jobs were added by US companies, this up from October’s numbers of 214,000. Also shown by a survey of economists in the Bloomberg News was the unemployment rate staying at 5.8%, a six-year low.

The forecast for US gross domestic product is to grow 3% in 2015, this compared to the 1.2% growth for the euro area.

Michael Franzese, senior vice president of fixed income trading with ED&F Man Capital Markets in New York said that people think the US could drop a few percentage points off the gross domestic product due to the global slowdown.

The speculation of slower consumer price increases will make it possible for the Federal Reserve to hold off on increasing interest rates, which is stoking gains in the bond market.

Due in 10 years or more are Treasuries that this year has returned 20%. Treasuries due in five years or less have returned 1.5% as indicated in the US Treasury Bond Index by Bloomberg.

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David Goldstein

David is cool! :)

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