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Treasuries held gains from yesterday before a report forecast to show growth in U.S. service industries slowed in April, adding to evidence the recovery is faltering and underpinning demand for the safest assets.
Benchmark 10-year yields were within five basis points of a three-month low as the European Central Bank prepared to announce its latest interest-rate decision after reports yesterday showed euro-area manufacturing shrank in April and German unemployment rose. While all 58 economists surveyed by Bloomberg say the ECB will leave the rate at a record low of 1 percent, President Mario Draghi may hint the central bank is willing to provide more stimulus as Europe’s recession deepens.
“Treasury rates will stay low because we may be in a temporary soft patch in the U.S.,” said Niels From, chief analyst at Nordea Bank AB (NDA) in Copenhagen. “The market has started to adapt to the weaker economic data coming out of the U.S. and Europe. Today the focus is on the ECB meeting. Draghi may acknowledge the weak data and indicate the ECB is concerned about the outlook.”
The 10-year note yielded 1.93 percent at 7:22 a.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 traded at 100 19/32. The yield fell two basis points, or 0.02 percentage point, yesterday. It dropped to 1.88 percent on April 27, the lowest since Feb. 3.
The Institute for Supply Management’s index of non- manufacturing industries declined to a four-month low of 55.3 in April from 56 in March, according to economists surveyed by Bloomberg News. Services make up about 90 percent of the economy. Another report today will show first-time claims for jobless benefits fell last week, a separate survey showed.
Today’s “most notable report is the ISM service index,” Ralf Umlauf and Ulrich Wortberg, strategists at Helaba Landesbank Hessen-Thueringen in Frankfurt, wrote in a client note today. “This is expected to come in slightly weaker.”
Treasury 10-year yields dropped to 1.90 percent yesterday after ADP Employer Services said U.S. employment increased less than economists forecast in April. The yield on similar-maturity Germany bunds fell to a record 1.599 percent.
“We’re in a new environment where yields will be lower in the high-quality assets,” said Bin Gao, head of rates research for Asia and the Pacific at Bank of America Merrill Lynch in Hong Kong. “We’re running out of high-quality bonds.”
Germany has an AAA debt ranking from Moody’s Investors Service, Fitch Ratings and Standard & Poor’s. The U.S. has the top grades from Moody’s and Fitch, and is ranked one step lower at AA+ by S&P.
The Federal Reserve plans to buy as much as $2 billion of Treasuries due from February 2036 to February 2042 today, according to the Fed Bank of New York’s website.
The purchases are part of the U.S. central bank’s effort to replace $400 billion of shorter-term debt in its holdings with longer maturities to hold down borrowing costs.
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, known as QE1 and QE2, to support the economy. Policy makers have pledged to keep the target for overnight bank lending at almost zero until at least late 2014.
The Treasury rally is poised to end, according to a Bloomberg survey of economists. U.S. 10-year yields will increase to 2.53 percent by year-end, the data shows.
“Yields will head back up,” said Andy Cossor, the Hong Kong-based chief market strategist at DZ Bank AG, Germany’s fourth-largest lender. “We’re looking for better economic data from the U.S. The U.S. is not going into a recession, and therefore there will be no justification for launching QE3.”
Ten-year yields will rise to 2.25 percent in three months, DZ Bank predicts.
U.S. employers hired 160,000 workers in April, versus 120,000 in March, according to a Bloomberg survey before the Labor Department data tomorrow.
Ten-year yields “remain in a small range” above key resistance levels at 1.87 percent and 1.785 percent, Credit Suisse Group AG said, citing trading patterns. “The range is expected to hold ahead of Friday’s payroll number,” the strategists led by David Sneddon, head of technical analysis in London, wrote in a note today.
Resistance refers to a level where orders to sell a security may be grouped.
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