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June 3 (Bloomberg) -- Treasuries rose, pushing yields on two-year notes to their lowest level this year, as U.S. job growth in May was less than a third of what economists forecast and the unemployment rate increased to 9.1 percent.
Two-year securities had their eighth straight weekly rally on speculation the Federal Reserve will keep borrowing costs low into next year. U.S. debt pared gains as Luxembourg’s Jean- Claude Juncker, who leads the group of euro-area finance ministers, said the European Union will approve a new relief plan for Greece.
“The economic data was very sobering as we continue to see affirmation after affirmation of a domestic slowdown,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., one of the 20 primary dealers that trade with the central bank. “The new aid plan for Greece is taking some fear out of the markets.”
The yield on two-year notes dropped three basis points, or 0.03 percentage point, to 0.43 percent at 5:23 p.m. in New York, according to Bloomberg Bond Trader prices. The 0.5 percent security due in May 2013 increased 2/32, or 63 cents per $1,000 face amount, to 100 5/32.
The two-year note yield decreased five basis points this week and earlier today touched 0.41 percent, the lowest level since Nov. 9. The yield is 19 basis points higher than the fed funds target, the smallest spread since December. The 10-year note yield dropped four basis points to 2.99 percent, extending its weekly drop to nine basis points.
Nonfarm payrolls grew in May by 54,000 after an increase of 232,000 in the previous month, the Labor Department reported today. The median forecast of 89 economists in a Bloomberg News survey was for an increase of 165,000.
Treasuries rallied two days ago, pushing the 10-year note yield below 3 percent for the first time in 2011, as ADP Employer Services reported that companies added fewer jobs in May than economists forecast and the Institute for Supply Management said manufacturing expanded at the slowest pace in more than a year.
“The market’s glass was half full coming into the year, but now it’s clearly half empty as investors have been taken on a roller coaster ride with the economic data,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “You don’t want to fight the tape. There are a lot of pieces of the recovery puzzle that is keeping the Treasury market well bid.”
Fed Rate Outlook
As U.S. reports show the world’s largest economy is losing momentum, traders have cut bets that the Fed will increase its target rate for overnight lending early next year.
Futures contracts show the likelihood of an increase in the fed funds target by the central bank’s March 2012 meeting fell to 23 percent today, from 26 percent yesterday. The Fed has held its benchmark at zero to 0.25 percent since December 2008.
The central bank bought $6.9 billion of securities due from August 2018 to May 2021 today to support the economy under its $600 billion second round of quantitative easing. The program, also known as QE2, expires this month.
“People will start talking about QE3,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “The economy looks like it’s turning south.”
Pacific Investment Management Co.’s Bill Gross said QE3 is unlikely even with the economy adding fewer jobs. Policy makers are like to “extend the extended period” language, Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene, referring to the amount of time the central bank plans to keep rates low.
Bonds pared gains today as EU and International Monetary Fund officials agreed to pay the next installment to Greece under last year’s 110 billion-euro ($161 billion) bailout, paving the way for an upgraded aid package that includes a “voluntary” role for investors.
Greece’s Prime Minister George Papandreou will set up an agency to manage an accelerated asset-sale effort and make “significant” cuts in public-sector employment, according to a statement released today in Athens.
The yield on 10-year German bunds, Europe’s benchmark debt securities, increased seven basis points to 3.06 percent after falling on America’s payrolls report.
U.S. debt dropped yesterday after Moody’s Investors Service said it expects to place the government’s Aaa rating under review for possible downgrade if there is no progress on increasing the statutory debt limit in coming weeks.
The Treasury Department reiterated this week that U.S. authority to borrow under the $14.29 trillion debt limit will expire Aug. 2.
The U.S. government will auction $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in three offerings beginning June 7, the Treasury Department announced yesterday.
“Even at these low levels, supply should be well spoken for next week,” said Richard Bryant, head of Treasury trading in New York at the primary dealer MF Global Inc., referring to yields at this year’s low.
--With assistance from Liz Capo McCormick in New York. Editors: Dennis Fitzgerald, Greg Storey
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