Bloomberg News

Treasury 10-Year Yield Falls to 3-Month Low on Jobs Datas

May 05, 2012

Treasuries rose for the seventh week, the longest stretch since 2008, as employers in the U.S. added fewer jobs than forecast amid speculation the Federal Reserve may consider additional stimulus measures to boost the economy.

Treasury 10-year yields fell to a three-month low as payrolls added the least jobs in six months to fuel concern the U.S. economic recovery is faltering. Yields fell before elections in Europe that may result in leadership changes and inflame the region’s sovereign-debt crisis. The U.S. will sell $72 billion in notes and bonds next week.

“Yields are reflecting a fair amount of concern for growth, in both the U.S. and abroad,” said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management in Milwaukee. “We had unrealistically strong data for months and now we are paying for it. Weak growth, Fed policy and weakness in Europe are keeping yields low.”

The benchmark 10-year note yield this week fell six basis points, or 0.06 percentage point, to 1.88 percent in New York, according to Bloomberg Bond Trader prices. Yesterday it touched 1.87 percent, the lowest since Feb. 3.

The weekly drop in yield matches the longest run since the seven weeks ended Dec. 19, 2008, at the height of the financial crisis.

The 10-year yield will “rest” below 2 percent for the next 45 days, Bill Gross, who runs the world’s biggest mutual fund at Newport Beach, California-based Pacific Investment Management Co., said in an interview yesterday with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

Inflation Prospects

U.S. employers added 115,000 jobs in April after a revised increase of 154,000 positions in the previous month, the Labor Department reported yesterday in Washington. The median forecast of 85 economists in a Bloomberg News survey was for an increase of 160,000. The unemployment rate fell to 8.1 percent.

Average hourly earnings for the 12 months ended April rose 1.8 percent, the Labor Department said. The measure has averaged 1.9 percent for the previous two years, compared with a 2.9 percent average for three years ended April 2010.

Bond traders have priced in an average rate of inflation of 2.2 percent for the next 10 years, as measured by the difference between 10-year yields on Treasury Inflation-Protected Securities and regular U.S. government securities, a difference known as the break-even inflation rate. The median forecast shown by the spread is 2.3 percent during the past 10 years.

‘No Wage Growth’

“Inflation concern is moot at this point,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There is absolutely no wage growth. How do you get inflation if people can’t pay for higher prices? You don’t.”

The gap between Treasury yields for two- and 10-year securities has narrowed to 1.63 percentage points, the smallest in seven months, from 2.09 percentage points on Oct. 27, as investors have become increasingly skeptical about the economy’s ability to sustain growth without Fed support.

Valuation measures show investors are paying a premium to own the safety of U.S. government securities. The so-called term premium model created by economists at the Federal Reserve was negative 0.72 percent yesterday, down from negative 0.26 percent on March 29 and near the record low of 0.79 percent reached Feb. 2. The average is positive 0.53 percent for the past decade. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Lack of ‘Traction’

Treasuries of all maturities have returned 2.3 percent including reinvested interest between March 20, when the 10-year note yield reached its high for the year of 2.4 percent, and May 3, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Stock Index fell by 1 percent during the same period.

Volatility as measured by the Bank of America Merrill Lynch MOVE index fell to 62.90 on April 30, the lowest since June 2007, indicating the market isn’t betting on a significant rise in yields in the near term.

While the Fed refrained at a two-day meeting last week from new actions to boost the economy, Chairman Ben S. Bernanke said it’s “prepared to do more” if necessary. The Fed bought $2.3 trillion of bonds in two rounds of quantitative easing, or QE, from December 2008 to June 2011 to lower borrowing costs.

“You’ve got this economy that can’t get any sustained period of traction,” said Mitchell Stapley, the Grand Rapids, Michigan-based chief fixed-income officer for Fifth Third Asset Management. “You’ve got more of the same coming, an increased potential of QE3 or something like that.”

Treasury Auctions

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. The Treasury delayed decisions on whether to sell floating-rate securities and bills with negative yields at government auctions for the first time.

The jobs data came a day after the Institute for Supply Management’s index of U.S. service industries, which account for almost 90 percent of the U.S. economy, decreased to 53.5 in April from 56 a month earlier. The Tempe, Arizona-based group’s measure was projected to decline to 55.3, according to a Bloomberg survey. Readings above 50 signal expansion.

France, Greece

Joblessness in the 17-nation euro area increased to 10.9 percent in March, the highest since April 1997, from 10.8 percent a month earlier, data showed this week.

Euro-region services and manufacturing output contracted more than initially estimated in April, a composite measure showed yesterday, adding to signs of a deepening economic slump.

“We still have elections in Europe this weekend,” said Richard Schlanger, vice president at Pioneer Investments in Boston. “The market can’t move a lot.”

Francois Hollande, the Socialist challenger for the French presidency who is leading incumbent Nicolas Sarkozy in opinion polls, has called for a re-negotiation of the budget pact has criticized Europe’s German-led austerity push and argued for the renegotiation of the region’s fiscal compact. Greece, which completed the largest debt restructuring in history this year, also holds an election on May 6.

The vote in Greece may amplify the mutiny against the wage and spending cuts and tax increases that are conditions for drawing on financial aid and staying in the currency.

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending May 1, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 144,756 contracts on the Chicago Board of Trade. Net-short positions fell by 12,334 contracts, or 8 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

To contact the editor responsible for this story: Robert Burgess at bburgess@bloomberg.net


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