Bloomberg News

Treasuries Gain Before Payroll Report Forecast to Show Slowdown

September 01, 2011

Sept. 1 (Bloomberg) -- Treasuries advanced before a government report tomorrow forecast to show the pace of growth in nonfarm payrolls is slowing, adding to the trend of weakening economic data.

U.S. debt yields fluctuated between gains and losses earlier after the Institute for Supply Management’s factory index fell less than forecast in August, U.S. initial jobless claims were almost as projected last week and European manufacturing shrank in August more than initially estimated. Minutes from the Federal Reserve’s Aug. 9 meeting released this week showed some policy makers urged action to stimulate a sluggish economy, leading to speculation the central bank may consider additional measures.

“Even though Treasury yields are historically low, we have room to go lower if we get any kind of indication the economy is falling out of bed,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. There aren’t many investors willing to be short “going into a big number like this. Many of them” were covering short positions. A short position is a bet an asset will declined in value.

Yields on 10-year notes fell nine basis points, or 0.09 percentage point, to 2.13 percent at 5:01 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.125 percent security maturing in August 2021 rose 26/32, or $8.13 per $1,000 face amount, to 99 30/32. The yield rose earlier as much as five basis points.

Thirty-year bond yields fell 11 basis points to 3.50 percent and two-year note yields dropped two basis points to 0.18 percent, the lowest since Aug. 18

August Performance

Ten-year yields declined 57 basis points last month, the most since a 71 basis point drop in December 2008. The yield slid to a record low of 1.97 percent on Aug. 18.

“There’s a lot of pessimism at these levels,” said Sean Murphy, a trader at Societe Generale SA in New York. “It’s all about data dependency, whether you’ll see quicker action out of the Fed come September.”

Treasuries returned 2.8 percent in August as the Standard & Poor’s 500 Index lost 5.7 percent and high-yield bonds lost 2.8 percent, according to Bank of America Merrill Lynch indexes.

The August rally in Treasuries, the sharpest monthly advance since the depths of the financial crisis in December 2008, came as bond investors cut expectations for inflation.

Inflation Rate

The break-even inflation rate, the yield difference between 10-year Treasury notes and inflation-indexed U.S. government bonds of similar tenor, was 2.10 percentage points today, after falling to 1.96 percentage points on Aug. 18, the lowest since October. It has averaged 2.06 percentage points during the past five years.

The Labor Department is likely to say the economy added 68,000 jobs in August, compared with 117,000 in July, according to the median forecast of 84 economists in a Bloomberg News survey before tomorrow’s report.

Economists at Goldman Sachs Group Inc. said the slow pace of hiring recently in the U.S. led them to cut their August payroll forecast to a 25,000 gain. The revised estimate is down from a prior projection of a 50,000 increase, the economists said.

A few Fed policy makers, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge adopted at the Aug. 9 meeting of the Federal Open Market Committee to hold its key interest rate at a record low at least until mid-2013, the minutes said.

Fed Discussions

Fed officials discussed a range of tools, including buying more government bonds to bolster the economy without coming to an agreement on what they might do next should the economy weaken further. They will more fully debate their options when they gather Sept. 20-21 for a two-day meeting that was originally scheduled to last one day.

“There’s been an acknowledgement or concession from the Fed that any talk of an exit is gone,” said Richard Gilhooly, an interest rate strategist at Toronto-Dominion Bank’s TD Securities unit in New York. “The market is dysfunctional, awaiting their every move. The market will be expecting the Fed to act or not act based on that one employment number.”

The ISM’s factory index fell to 50.6 last month, the lowest level since July 2009, from 50.9 in July, the Tempe, Arizona-based group said today. Economists projected the gauge would drop to 48.5, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.

Jobless claims fell by 12,000 to 409,000 in the week ended Aug. 27, Labor Department figures showed today in Washington. Economists surveyed by Bloomberg News projected a drop to 410,000, according to the median forecast. The figure remains higher than it was three weeks earlier, before the labor dispute at Verizon Communications Inc. pushed the numbers up.

A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 49 from 50.4 in July, Markit Economics said today. That’s below an initial estimate of 49.7 published on Aug. 23. A reading below 50 indicates contraction.

--With assistance from Timothy R. Homan in Washington. Editors: Paul Cox, Dennis Fitzgerald

To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net


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