Bloomberg News

Treasury Yields Near 3-Month Low on European Slowdown

May 02, 2012

Treasury 10-year yields approached the lowest level in almost three months as manufacturing contracted in Europe and private employers in the U.S. added fewer workers than forecast, underpinning demand for the safest assets.

The Treasury, in its quarterly refunding announcement, delayed decisions on whether to sell floating-rate securities and bills with negative yields at government auctions for the first time. The U.S. will issue $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days beginning May 8, the same amounts sold in each so-called refunding month since November 2010.

“With all the data, we’ve definitely hit a bump in the road,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Federal Reserve. “We caught the bid overnight,” he said, as Treasuries rallied along with German government debt.

The 10-year note yield fell two basis points, or 0.02 percentage point, to 1.93 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 gained 1/8, or $1.25 per $1,000 face amount, to 100 5/8. The yield dropped to 1.88 percent on April 27, the lowest level since Feb. 3.

Companies in the U.S. added 119,000 workers in April, according to figures from Roseland, New Jersey-based ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for a 170,000 advance. Estimates of the 37 economists ranged from gains of 100,000 to 200,000.

Floating-Rate Notes

The Treasury said it sees benefits in the issuance of floating-rate notes and a decision will be made “at a later date.” While there are good reasons to have negative yields at Treasury auctions, a department official said, no decision has been made and there are operational challenges.

Maturing Treasuries available for reinvestment will total $36.7 billion, and the sales will raise $35.3 billion of new cash, estimates Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey.

A euro-region factory gauge based on a survey of purchasing managers slipped to a 34-month low of 45.9 from 47.7 in March, London-based Markit Economics said. A reading below 50 indicates contraction. German unemployment increased by a seasonally adjusted 19,000 to 2.87 million, the Nuremberg-based Federal Labor Agency said. Economists forecast a decline of 10,000.

‘Soft Data’

“The soft data is starting to pile up,” James Collins, an interest-rate strategist in the futures group in Chicago at Citigroup Global Markets Inc., a primary dealer. “We’re skewed toward lower yields.”

Yields on German two-year debt fell as low as 0.066 percent while 10-year bunds declined as low as to 1.60 percent, both record lows.

Fed Chairman Ben S. Bernanke said April 25 the central bank is ready to add to its stimulus if necessary, even after it upgraded its view of the economy.

Treasuries handed investors a return of 9.8 percent last year, according to Bank of America Merrill Lynch indexes, as financial turmoil in the euro-region boosted demand for the safest assets. The securities are little changed this year.

HSBC Holdings Plc and Markit Economics said China’s Purchasing Managers’ Index for April advanced to 49.3 from a preliminary 49.1 reported on April 23 and a final 48.3 the previous month. A reading below 50 indicates contraction.

Payrolls increased by 161,000 last month after a 120,000 gain in March, a Bloomberg survey showed before the Labor Department announces the figures on May 4.

‘Not Sustainable’

“We all know from listening to Bernanke that payrolls over the next several months are really what they’re focused on when it relates to quantitative easing,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The recovery’s not sustainable on its own. It needs further accommodation.”

U.S. policy makers have pledged to keep the benchmark target for overnight bank lending at almost zero until at least late 2014. The central bank has also purchased $2.3 trillion of debt in two rounds of quantitative easing, or QE, to lower borrowing costs.

John Williams, president of the San Francisco Fed, joined his counterparts from Richmond, Philadelphia and Atlanta yesterday in casting doubt on the need for additional purchases of bonds to push down longer-term interest rates. Three of them are voting members of the Federal Open Market Committee, which sets interest rates.

‘Further Progress’

Thresholds for further action “would be if we see economic growth slow to the point where we’re not seeing further progress in bringing the unemployment rate down,” Williams said at a conference in Beverly Hills, California. Those aren’t “the circumstances I currently expect,” he said.

The Fed sold $1.34 billion of Treasury Inflation Protected Securities maturing from January 2014 to April 2015 today as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term securities in an effort to reduce borrowing costs further and counter rising risks of a recession.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Emma Charlton in London at echarlton1@bloomberg.net

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


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