June 1 (Bloomberg) -- Treasuries surged, pushing 10-year note yields below 3 percent for the first time in 2011, as U.S. companies added fewer jobs in May than economists forecast and manufacturing expanded at the slowest pace in more than a year.
Yields dropped the most in more than two months after falling last month the most since August. The yields fell today below those of benchmark 10-year German bunds for the first time in almost four weeks. The ADP Employer Services report on company hiring came two days before the Labor Department’s payrolls figures, which are forecast to show hiring slowed.
“Things have clearly changed,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “With the economy rolling over, investors are getting concerned and flocking to the safety and quality of Treasuries.”
Benchmark 10-year note yields dropped 12 basis points, or 0.12 percentage point, to 2.94 percent at 5:21 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent security due in May 2021 increased 1 1/32, or $10.31 per $1,000 face amount, to 101 18/32.
Yields closed at the lowest level since Dec. 6 after the biggest slide on a closing basis since March 16. The yields dropped 23 basis points in May, the most since falling 44 basis points in August.
A gain of more than one point in the 30-year bond today pushed yields to 4.13 percent, the lowest since Dec. 1. Two-year note yields touched 0.43 percent, the lowest since Dec. 7.
Treasury note investors were more pessimistic than optimistic on U.S. debt going into the week, according to a sentiment index based on a poll of clients by JPMorgan Chase & Co. The difference between the percentage of investors expecting debt prices to increase and those expecting a decrease was negative 14 percent.
“A lot of the real-money accounts who have not been involved have been caught off guard,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 20 primary dealers authorized to trade directly with the Federal Reserve. “They will have to purchase securities out at the longer end of the yield curve to meet portfolio needs.”
Treasuries returned 1.6 percent in May, the most since August, according to Bank of America Merrill Lynch indexes, as Europe’s sovereign-debt crisis and a weakening U.S. economy fueled demand for government debt.
Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co., said the returns have lulled investors into a false sense of security because yields aren’t high enough relative to inflation.
“Much of the Treasury yield curve now rests in negative territory when compared with expected future inflation, and that should send our bond investors into a hopping funk,” Gross wrote in his monthly investment commentary today on Newport Beach, California-based Pimco’s website. “Prices are already nearing the boiling point.”
With the consumer price index rising 3.2 percent on an annual basis in April, the 10-year note yield offers investors a so-called real yield of about negative 0.20 percent.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, fell to 2.2 percentage points, the narrowest spread since January.
ADP reported that companies in the U.S. added only 38,000 workers in May compared with the addition of 177,000 in the previous month. The median forecast of 37 economists in a Bloomberg News survey was for an increase of 175,000.
Analysts cut their forecasts for growth in nonfarm payrolls, with Goldman Sachs Group Inc., a primary dealer, lowering its outlook to 100,000 from 150,000 after today’s data.
Employers added 170,000 positions last month after an increase of 244,000 in April, the Labor Department is forecast by economists to report June 3. The unemployment rate may have fallen to 8.9 percent to 9 percent.
Bonds extended their gains after the Institute for Supply Management reported that its factory index dropped to 53.5 last month from 60.4 in April. The median forecast of 83 economists in a Bloomberg News survey was for a decrease to 57.1. Figures higher than 50 signal expansion.
Fed Rate Outlook
Futures contracts show the likelihood of a Fed rate increase by March 2012 has dropped to 25 percent from 44 percent a month ago. The central bank has kept its target rate for overnight lending between banks in a range of zero to 0.25 percent since December 2008.
The Fed bought $7.37 billion of debt maturing from July 2017 to May 2018 today to support the economy under its $600 billion second round of quantitative easing, which expires this month.
U.S. 10-year notes yielded five basis points less than similar-maturity benchmark German debt, trailing for the first time since May 6 on a closing basis. The 10-year bund yielded 2.99 percent.
Treasury gains will still give way to losses later this year, according to economists’ estimates. Yields on 10-year notes will advance to 3.82 percent by Dec. 31, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.
--With assistance from Susanne Walker in New York and Garth Theunissen in London. Editors: Dennis Fitzgerald, Greg Storey
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