Bloomberg News

Treasuries Poised for Weekly Advance Before U.S. Payrolls Report

September 02, 2011

Sept. 2 (Bloomberg) -- Treasuries headed for a weekly gain before a report forecast to show U.S. companies created fewer jobs in August and the unemployment rate exceeded 9 percent for a fourth month, adding to signs the economy is slowing.

Yields on 10-year notes were poised for a fifth drop in six weeks as European equities and U.S. stock-index futures fell today, bolstering demand for safety. Two-year notes yielded 0.18 percent, below the upper range of the Federal Reserve’s target rate, after the central bank pledged last month to keep borrowing costs low until at least mid-2013.

“The market’s key focus is obviously the U.S. employment report,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “But even if we saw renewed signs of labor shedding, downside for risk must be limited because the markets must just conclude that this would increase chances of the Fed doing another round of monetary easing.”

Yields on benchmark 10-year notes were unchanged at 2.13 percent at 7:18 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 were at 99 30/32. The yields have fallen six basis points, or 0.06 percentage point, this week after sinking to a record low 1.97 percent on Aug. 18.

The Stoxx Europe 600 Index declined 1.9 percent today, and futures on the Standard & Poor’s 500 Index slid 0.9 percent. German government bonds rose, with the 10-year security yielding 2.08 percent.

Bond Returns

Treasuries returned 2.8 percent in August, the most since the depths of the financial crisis in 2008, according to indexes compiled by Bank of America Merrill Lynch.

U.S. employers added 68,000 workers last month, down from 117,000 in July, according to the median forecast of 86 economists in a Bloomberg News survey before today’s report from the Labor Department.

Economists at Goldman Sachs Group Inc. said the slow pace of recent hiring led them to cut their August payroll forecast to 25,000. The revised estimate is down from a prior projection of 50,000, they wrote in a note to clients yesterday. The unemployment rate held at 9.1 percent, a separate Bloomberg News survey predicts the Labor Department will say.

The Office of Management and Budget said in an update of its economic forecasts through August that the jobless rate will average 9.1 percent in 2011 and 9 percent next year. President Barack Obama will address a joint session of Congress on Sept. 8 on his plans to boost jobs and accelerate growth.

‘Gloomy Prognosis’

“There’s a pretty gloomy prognosis for the U.S. economy factored into the market, so today’s numbers would have to be pretty weak for U.S. Treasury yields to move down to the lows we saw a few weeks ago,” RIA’s Stamenkovic said.

Minutes of the Fed’s Aug. 9 meeting released this week showed some policy makers urged further action to stimulate the sluggish economy, leading to speculation the central bank will consider additional measures.

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 meeting to hold borrowing costs at zero to 0.25 percent, according to the minutes. Policy makers will convene on Sept. 20-21 for a two-day meeting that was originally scheduled to last just one day.

“It’s quite clear that the Fed is willing to provide more stimulus,” said Khoon Goh, head of market economics and strategy at ANZ National Bank Ltd. in Wellington. “It looks like the hurdle for a full-blown quantitative easing is too high. Maybe they will shift the duration of the balance sheet, selling short-term paper and purchasing long-dated Treasuries.”

Yields on 30-year bonds, which are most sensitive to inflation, increased two basis points to 3.51 percent today. Five-year note yields were at 0.90 percent.

The so-called break-even rate, the difference in yield between 10-year Treasuries and similarly dated inflation-indexed government bonds, was 2.09 percentage points today, after shrinking on Aug. 18 to 1.96 percentage points, the narrowest since October.

--Editors: Dennis Fitzgerald, Mark McCord

To contact the reporters on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Monami Yui in Tokyo at myui1@bloomberg.net

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


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