Bloomberg News

Treasuries Rise as Slowing Job Gains Fuel Bets on Fed

July 06, 2012

Treasuries rose for a second day after the U.S. economy added fewer jobs than forecast last month, prompting investors to increase bets the Federal Reserve will resort to a third round of asset purchases.

Ten-year notes had their best weekly gain in a month after the Labor Department report showed the U.S. is making scant progress toward reducing joblessness. Implied yields on Eurodollar and federal fund futures fell as the below- expectations number of jobs added emboldened traders to wager that the central bank will keep rates locked near zero percent and is likely to embark on more so-called quantitative easing.

“You do have some further pricing in of QE3,” said Adam Brown, director of Treasury trading at Barclays Plc in New York, one of 21 primary dealers that trade with the Fed. “It’s hard to tell if it’s a risk-off trade or if it’s QE-specific, but I think they’re related. If you think QE is going to happen generally you’re going to be bullish on rates.”

The 10-year yield fell five basis points, or 0.05 percentage point, to 1.55 percent at 5:33 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2022 rose 14/32, or $4.38 per $1,000 face value, to 101 26/32. The yield reached 1.54 percent, the lowest level since June 5.

The 10-year yield declined 10 basis points this week, the biggest drop since it tumbled 29 basis points in the five days ended June 1.

The benchmark note’s record low yield of 1.44 percent was set June 1 after payrolls climbed less than the most-pessimistic forecast in a Bloomberg News survey.

Fed Sale

The U.S. central bank sold $7.93 billion of Treasuries maturing between January and May 2013 as part of its program to replace holdings of shorter-term securities with longer-term bonds.

The Treasury will auction $66 billion of notes and bonds at sales next week: $32 billion of three-year debt on July 10, $21 billion of 10-year securities on July 11 and $13 billion of 30- year bonds on July 12.

Treasuries have returned 2 percent this year, according to Bank of America Merrill Lynch data, compared with a 9.8 return in 2011.

Treasury 10-year yields need to fall below 1.55 percent to confirm a resumption of the notes’ underlying “bull trend” and decline toward the record low, analysts including David Sneddon, head of technical-analysis research at Credit Suisse Group AG in London, wrote in a note to investors.

U.S. payrolls rose 80,000 last month after a 77,000 increase in May, Labor Department figures showed today in Washington. Economists projected a 100,000 gain, according to the median estimate in a Bloomberg News survey. The unemployment rate held at 8.2 percent.

Lackluster Jobs

“The unemployment number shows listlessness in the U.S. economy,” said Tony Crescenzi, a strategist at Newport Beach, California-based Pacific Investment Management Co., which oversees the world’s largest bond fund, in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “It’s clearly growing too slowly to keep the unemployment rate from rising and with continued figures like this, one would expect the Federal Reserve to continue to be what it’s been, which is activist, and adopt a QE3.”

Eurodollar futures contracts, which are based off expectations for the three-month dollar London interbank offered rate, or Libor, and changes in central bank monetary policy, were down between one and three basis points for contracts that expire through the end of 2015. The implied yield on the December 2014 contract was 0.745 percent, down two basis points compared with yesterday and from one basis point just before the 8:30 a.m. payroll report.

Benchmark Rate

The Fed lowered its benchmark interest rate to zero in December 2008 and has said economic conditions will probably warrant holding the rate low through at least late 2014.

Eurodollar trade in price terms with the implied yield is derived by subtracting the contract price from 100.

The Federal funds futures contract expiring in December 2012, traded on Chicago-based CME Group electronic exchange, is down one basis point to 0.165 percent. The futures are settled at expiration to the average for the fed funds effective rate during the contract month.

“Federal funds futures are trading a little better across the curve today,” said Kenneth Silliman, head of U.S. short- term rates trading at Toronto Dominion Bank’s TD Securities unit in New York. “This data would be another check in the box for the potential for the QE3 camp down the road.”

Global Action

Central banks, including the Fed, have stepped in to bolster the economy as global growth has slowed and as hiring in the U.S. has dropped off from a 19-month high of 275,000 in January.

The Fed said June 20 that it would enlarge its program of replacing shorter-term securities from its Treasury holdings with longer-term securities to $667 billion from $400 billion. The central bank has purchased in two rounds of QE $2.3 trillion of government and mortgage securities to help lower private sector and government borrowing costs.

“The Fed may or may not do QE,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $72 billion. “They stand ready to do more. My issue as a portfolio manager is I don’t think it’s going to do very much.”

Treasuries rallied yesterday as the ECB reduced its benchmark rate to a record low of 0.75 percent and took its deposit rate to zero. President Mario Draghi said “economic growth in the euro area continues to remain weak with heightened uncertainty weighing on both confidence and sentiment.”

Yield Forecast

Ten-year yields will climb to 2.12 percent by year-end, according to a Bloomberg survey with the most recent forecasts given the heaviest weightings. The yield has averaged 3.2 percent over the past five years.

Unemployment in the U.S. has averaged 9.1 percent since President Barack Obama took office in January 2009. It was 7.8 percent at that time, up from 5 percent in January 2008.

Treasuries climbed this week after the European Central Bank and the People’s Bank of China both cut interest rates and the Bank of England increased its asset-purchase program.

“You are seeing coordinated central-bank action across the globe now,” Silliman said. “There is a lot of liquidity that is going to be around in global markets for quite a while.”

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Liz Capo McCormick in New York at emccormick7@bloomberg.net

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


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