Bloomberg News

Treasury Yields Tumble to Records on Jobs Data, Europe

June 02, 2012

Treasuries rallied, pushing 10- and 30-year yields to all-time lows, after the economy added fewer jobs in May than economists forecast, and concern festered that the European sovereign-debt crisis may spread.

U.S. 10-year note yields dropped below 1.5 percent for the first time, posting the biggest weekly drop in eight months, after the Labor Department reported U.S. employment growth was the least in a year. Morgan Stanley said the probability of more central bank policy stimulus reached 80 percent as Federal Reserve Chairman Ben S. Bernanke prepared to testify before Congress on June 7 about the outlook for the U.S. economy.

“Given the fear in Europe and the weak employment number, rates continue to press lower, beyond levels anyone expected,” said Scott Minerd, chief investment officer of Guggenheim Partners LLC, who oversees more than $125 billion from Santa Monica, California. “This event was another nail in the coffin, which makes some sort of policy accommodation a foregone conclusion.”

The benchmark 10-year yield fell 29 basis points for the week, or 0.29 percentage point, to 1.45 percent in New York, according to Bloomberg Bond Traders prices. The 1.75 percent security maturing in May 2022 gained 2 20/32, or $26.25 per $1,000 face amount, to 102 3/4. The yield reached an all-time low yesterday for a third consecutive day, trading at as little as 1.4387 percent.

Long Bonds

Thirty-year bond yields declined 32 basis points to 2.52 percent, reaching as low as 2.5089 percent, below the record 2.5090 percent on Dec. 18, 2008, according to Fed figures beginning in 1953. Five-year notes set a record at 0.59 percent while seven-year debt established an all-time low 0.91 percent.

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures by 55,112 contracts, or 40 percent, in the week ending May 29, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, still outnumbered long positions by 81,078 contracts on the Chicago Board of Trade.

The difference between the yields on the 10-year and 30- year securities narrowed to almost the least since January on reduced concern inflation will erode the value of fixed-income assets. The gap narrowed to 108 basis points, close to the least since January. It closed at 107 basis points on May 21 after widening to a 2012 high of 120 basis points on May 1.

Yield Differences

The difference between the yield on the two-year and 10- year notes, dropped to 121 basis points, the least since June 2008.

“It’s a recalibration of growth expectations, as well as a pullback of global inflationary pressures,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Treasuries had their best performance last month since August, returning 1.8 percent, reflecting the declining stability of the 17-member euro currency amid a worsening sovereign-debt crisis, according to indexes compiled by Bank of America Merrill Lynch. The MSCI All-Country World Index of shares slid 8.9 percent in the same period. The euro declined 6.6 percent versus the dollar in May, the most since September.

U.S. 10-year yields are down from 5.3 percent in June 2007, before the financial crisis intensified, and below the average of 4.96 percent during the past 20 years.

Next Level

“There was supposed to be resistance at 1.50 percent, but with a lousy employment report, it didn’t amount to much,” said FTN Financial Chief Economist Christopher Low, the most accurate forecaster of Treasury note yields in 2011. Resistance is an area on a chart where pre-established orders may be clustered.

“People have been saying 1.25 percent, but the trading over the next few days will determine if 1.25 percent is realistic,” said Low who was the only one among 70 analysts in a Bloomberg News survey who predicted the yield would fall to 2 percent by the end of last year.

Valuation measures show Treasuries are at the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.96 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The U.S. central bank sold $8.6 billion of Treasuries due from September 2012 to April 2013 yesterday, according to the Fed Bank of New York’s website. The sales are part of its program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of this month to support the economy by keeping down borrowing costs.

Fed Speculation

Investors have stepped up speculation that added stimulus would focus on home-loan bonds after Fed Chairman Bernanke sent a study to Congress in January that highlighted how housing is restraining the economic recovery.

The 69,000 jobs added last month were less than the most- pessimistic forecast in a Bloomberg News Survey. The median forecast of 85 economists in a Bloomberg News survey before yesterday’s jobs report, was for an increase of 150,000 jobs. The unemployment rate rose to 8.2 percent, the Labor Department said.

Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed on May 31.

Global Outlook

“Given the outlook for the global economy and the U.S., it looks like we’re joining Asia and Europe for a slowing of the economy,” said Gary Pollack, who helps manage $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “We could go to lower levels in yields.”

German and U.K. yields fell to all-time lows after Spanish Economy Minister Luis de Guindos said the future of the euro is at stake. German two-year note yields fell below zero for the first time and 10-year yields on Austrian, Belgian, Dutch, Finnish and French bonds dropped to records.

As U.S. 10-year note yields drop to record lows, they are still yielding more than benchmark bond markets around the world. Yields on the 10-year note are 16 basis points higher than the average for comparable debt of nations from Germany to Australia, above the average of 12 basis points in the past year, data compiled by Bloomberg show.

’Serious Slowdown’

“We are on the edge of a more serious slowdown than what was otherwise anticipated coming into the data,” said Christopher Sullivan, who oversees $1.9 billion as chief investment officer at United Nations Federal Credit Union in New York. “On top of the European issues, the further decline in growth here and in other parts of the world are manifesting safe-haven buying.”

The difference in yields between 10-year notes and Treasury Inflation Protected Securities, or TIPS, which represents traders’ expectations for the rate of inflation during the life of the bonds, fell to 2.02 percentage points, almost the lowest since January. It touched a 2012 low of 1.9 percentage points on Jan. 3 and a high of 2.45 percentage points on March 20.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.47 percent on May 30, down from a 2012 high of 2.78 percent on March 19.

“In the U.S. we have an aggressive central bank, which has widely telegraphed that if there’s a slowing in growth they will act,” said Priya Misra, head of U.S. rates strategy at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Fed. “That’s what to me provides a floor in rates, not so much in real rates, but in break-evens.”

To contact the reporters on this story: Cordell Eddings in New York at; Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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