Bloomberg News

Treasuries Head for Weekly Gain on Speculation Job Gains Slowed

June 03, 2011

June 3 (Bloomberg) -- Treasuries rose, headed for a third consecutive weekly advance, before a report that economists predict will show U.S. employers hired fewer workers in May.

U.S. bonds recovered from a slump yesterday, when 10-year Treasuries posted the steepest intraday drop in almost three months. Moody’s Investors Service said yesterday that it will put the U.S. Aaa rating under review for a cut unless the government makes progress on increasing its debt limit. Signs that the world’s biggest economy is slowing helped keep benchmark yields within about eight basis points of this year’s low of 2.94 percent, reached on June 1.

“Treasuries have been in a fairly decisive bullish trend for some time now, and this is just a continuation,” said Luca Jellinek, head of European interest-rate strategy at Credit Agricole SA’s corporate- and investment-banking unit in London. “It’s very much on the back of the weak economic data coming out of the U.S., which confirms those views in the market that the recovery is going to be slow and gradual.”

Ten-year yields were one basis point lower at 3.03 percent at 8:18 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 rose 1/32, or 31 cents per $1,000 face amount, to 100 27/32.

The yield has fallen 15 basis points in three weeks. The decline was interrupted yesterday when the yield increased nine basis points, the most since Feb. 8.

‘Soft Patch’

Payrolls probably rose by 165,000, the smallest gain in four months, after increasing 244,000 in April, according to the median of 89 estimates in a Bloomberg survey of economists before the Labor Department report. The jobless rate fell to 8.9 percent from 9 percent, the survey shows.

“The U.S. is going through a soft patch,” said Jaemin Cheong, a bond trader in Seoul at Industrial Bank of Korea, the nation’s largest lender to small- and mid-sized companies. “Most investors prefer the quality of Treasuries. The rally can go on.”

The U.S. plans to auction $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds next week, the Treasury Department said yesterday, matching forecasts of 10 primary dealers in a Bloomberg News survey.

The $66 billion total compares with $72 billion when the U.S. sold this combination of securities in May.

Treasury Secretary Timothy F. Geithner has warned that a failure to raise the debt ceiling by Aug. 2, the date he now projects the borrowing authority will be exhausted, may have catastrophic effects on the U.S. economy by raising borrowing costs. Republican lawmakers are using the debt-ceiling talks to press for cuts in government spending.

Debt Ceiling

“If the negotiating stances of the two parties continue to be where they are now, in other words very far apart, and an agreement on the raising of the debt limit continues to look remote, probably by mid-July we would consider putting the rating on review for downgrade,” said Steven Hess, senior credit officer at Moody’s in New York.

In April, Standard & Poor’s put the U.S. on notice that it risks losing its AAA rating unless policy makers agree on a plan to reduce budget deficits and the national debt.

Treasury bears say the economy isn’t slowing enough to sustain the decline in yields. Investors should bet against 10- year notes, analysts led by Michael Cloherty at RBC Capital Markets Corp. in New York wrote in a report yesterday.

“Yes, the U.S. economy is not growing as fast as some expected, but the slowdown does not seem large enough to keep driving bond yields even lower, or even justify current yields,” according to RBC, one of the 20 primary dealers authorized to trade directly with the Federal Reserve.

Rate Outlook

Ten-year rates will advance to 4.13 percent by the middle of next year, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

U.S. government debt returned 1.6 percent last month, the most since August, according to Bank of America Merrill Lynch indexes, with the sovereign-debt crisis in Europe and signs of a slowdown in America’s economy spurring refuge demand.

The Fed’s policy of quantitative easing failed to meet the “ultimate objective” of boosting employment and economic growth, according to Mohamed El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund.

QE2

While the bond-purchase program pushed investors into higher-yielding assets such as stocks, the “transmission mechanism” to lower unemployment by driving more money into the economy didn’t work, El-Erian said yesterday in a radio interview from Newport Beach, California, on “Bloomberg Surveillance” with Tom Keene.

The Fed began the second round of asset purchases, known as QE2, in November after buying $1.7 trillion in securities through last year, increasing the amount of money in circulation to prevent deflation. The current purchases of $600 billion in Treasuries are due to end this month.

The central bank is scheduled to buy $6 billion to $8 billion of securities due from August 2018 to May 2021 today under the plan.

Traders cut bets on inflation as reports showed the U.S. economy is waning. Data this week signaled that manufacturing and hiring are slowing.

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, has narrowed to 2.25 percentage points from this year’s high of 2.67 percentage points in April. The 10-year average is 2.10 percentage points.

--With assistance from Ron Harui in Singapore. Editors: Mark McCord, Peter Branton, Dennis Fitzgerald

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Garth Theunissen in London gtheunissen@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net


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