Wall Street banks amass treasuries

Wall Street's biggest bond dealers are amassing the most Treasuries since March last year in a sign of confidence that a Federal Reserve's tightening cycle of higher interest rates will be orderly.

JPMorgan Chase & Co., Citigroup Inc. and the 20 other companies that trade with the Fed increased their holdings for a fourth week to a net $69 billion in data reported Thursday. Traders see about even odds of the first rate increase since 2006 in September before a Labor Department report Friday forecast by economists to show U.S. employers in July added more than 200,000 jobs for the fifth month this year and wages increased.

Investors have been encouraged by Fed Chair Janet Yellen's stated intention to raise interest rates at a gradual pace, which has been backed by the collapse in oil prices. Regulatory requirements that necessitate banks to hold more high-quality assets have also contributed to the jump in primary-dealer holdings of Treasuries, according to Barra Sheridan, a rates trader at Bank of Montreal in London.

"As much as it's about regulation, the rate path will be very, very, slow and gradual," Sheridan said. Fed officials "are not going to be embarking on an aggressive tightening cycle. People don't mind buying Treasuries at these levels because they are still attractive on a global basis."

Benchmark U.S. 10-year note yields were little changed at 2.23 percent as of 7:02 a.m. New York time. The yield on Germany's 10-year bunds, the euro area's benchmark sovereign securities, was at 0.70 percent. Primary dealers added $27.2 billion to their Treasuries holdings in the week to July 29, the biggest increase since October, data reported Thursday show. On July 21, the Volcker Rule came into full effect, which restricts proprietary trading at banks and makes it more expensive for them to warehouse debt in the expectation that clients will want to buy it.

Yellen said in congressional testimony last month she expects the central bank to raise its benchmark rate this year, while emphasizing the pace of increases will probably be gradual. U.S. benchmark borrowing costs will increase by about 60 basis points over the next year, according to market-implied policy rates.

Employers added 225,000 jobs in July, following a 223,000 increase the previous month, according to a Bloomberg survey of economists. Average hourly earnings climbed 2.3 percent from a year earlier, a separate survey showed.

Crude oil has tumbled more than 50 percent in the past 12 months, while consumer prices in the U.S. increased 0.1 percent in June from a year earlier. Tumbling inflation expectations have also stoked demand for longer-maturity Treasuries. The gap between two- and 30-year yields -- known as the yield curve -- compressed to the narrowest since April this week. The yield difference between two-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, touched a six-month low of 0.58 percent Thursday.