June 4 (Bloomberg) -- Treasury two-year securities rose for an eighth week in their longest winning streak since February 2008 as reports showed U.S. job growth in May was less than a third of what economists forecast and manufacturing slowed.
A rally in 10-year debt pushed yields below 3 percent for the first time in 2011 before next week’s auctions of notes and bonds totaling $66 billion. Bonds gained as traders increased speculation that the Federal Reserve will hold its target rate for overnight lending at virtually zero into next year.
“The economic data was very weak no matter how you look at it,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors. “The bond market has been right that the economy is certainly having big trouble correcting itself.”
The two-year note yield decreased this week five basis points, or 0.05 percentage point, to 0.43 percent in New York, according to Bloomberg Bond Trader prices. The 0.5 percent security maturing in May 2013 climbed 3/32, or 94 cents per $1,000 face amount, to 100 1/8.
The yield touched 0.41 percent yesterday, the lowest level since Nov. 9, and was only 18 basis points higher than the fed funds target, the smallest spread since December. The 10-year note yield dropped nine basis points to 2.99 percent after falling on June 1 to 2.94 percent, the lowest level since Dec. 7.
Nonfarm payrolls grew in May by 54,000 after an increase of 232,000 in the previous month, the Labor Department reported yesterday. The median forecast of 89 economists in a Bloomberg News survey was for an addition of 165,000. The unemployment rate increased to 9.1 percent from 9 percent.
“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.”
Treasuries rallied three days ago, pushing the 10-year note yield below 3 percent, 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.
As U.S. reports showed the U.S. economy is losing momentum, traders reduced bets that the Fed will increase its target rate for overnight lending early next year.
Fed Rate Outlook
Futures contracts showed the likelihood of a boost in the fed funds target by the central bank’s March 2012 meeting fell to 23 percent, compared with 26 percent odds a week ago. The central bank has held its benchmark at zero to 0.25 percent since December 2008.
The central bank bought $16.23 billion of securities this week 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 yesterday on “Bloomberg Surveillance” with Tom Keene, referring to the amount of time policy makers plan to keep rates low.
Bonds pared their weekly gains as European Union 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 yesterday in Athens.
Moody’s Investors Service said on June 2 that it expects to place the U.S. 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. A bill that would raise the debt limit by $2.4 trillion failed to win House passage in a vote that Democrats said was rigged to ensure its defeat.
The U.S. will auction $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds in offerings beginning June 7.
“Even at these low levels, supply should be well spoken for next week,” said Richard Bryant, head of Treasury trading in New York at MF Global Inc., referring to yields that touched this year’s low. The company is one of the 20 primary dealers obligated to participate in U.S. auctions.
--Editors: Dennis Fitzgerald, Paul Cox
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