Bloomberg News

Treasury 5-Year Yield Near Record Low Amid Slowing Signs

August 01, 2012

Treasury five-year note yields were six basis points from a record low as signs of an economic slowdown in the U.S., Europe and China boosted demand for the securities as a haven.

The notes remained higher following a two-day advance before reports today that economists say will show U.S. employers added the fewest workers in three months and that a gauge of euro-area manufacturing slid to a three-year low. Mark Mobius, executive chairman of Templeton Emerging Markets Group, said the Federal Reserve will end up buying bonds “forever.” The Fed will conclude a two-day policy meeting today.

“Economies are weak globally, resulting in a flight to quality,” said Hiromasa Nakamura, who helps oversee the equivalent of $42 billion as an investor at Mizuho Asset Management Co. in Tokyo. “Treasury yields have more room to decline.”

The benchmark five-year yield was little changed at 0.59 percent as of 6:37 a.m. in London, according to Bloomberg Bond Trader data. It reached the all-time low of 0.53 percent on July 25. The 0.5 percent security due July 2017 traded at 99 17/32 today. Ten-year yields were at 1.48 percent after falling eight basis points in the past two days to 1.47 percent yesterday.

Japan’s 10-year bond yields were little changed at 0.775 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. The benchmark rate reached 0.72 percent on July 23, the lowest since June 2003.

A gauge of China’s manufacturing was little changed at 50.1 in July, the lowest since November, a report from the Beijing- based National Bureau of Statistics and the China Federation of Logistics showed today. A reading below 50 signals contraction.

U.S. Economy

ADP Employer Services will probably say today that companies in the U.S. added 120,000 workers last month, according to the median estimate of economists surveyed by Bloomberg News. That would be the least since April and down from a 176,000 increase in June.

A gauge of manufacturing in the euro region dropped to 44.1 in July, a level unseen since June 2009, a separate poll of economists shows. London-based Markit Economics will release the final reading of the index today.

Fed Chairman Ben S. Bernanke said on July 17 that policy makers are “looking for ways to address the weakness in the economy should more action be needed.” The central bank’s policy-setting Federal Open Market Committee said in January that its benchmark interest rate will stay at “exceptionally low levels” at least through late 2014, extending its pledge from the middle of 2013.

‘QE-forever’

The Fed bought $2.3 trillion of mortgage and Treasury debt from 2008 to 2011 in two rounds of so-called quantitative easing, or QE, seeking to cap borrowing costs.

“They are not going to stop printing,” Templeton’s Mobius said at a briefing in Tokyo today, referring to the U.S. central bank. “It’s no longer going to be QE1, QE2, QE3, it’s going to be QE-forever until unemployment goes down.” His company manages about $50 billion in assets.

Twenty-six percent of economists forecast the Fed will extend its rate pledge today, while 74 percent expect the central bank not to change its forward guidance, according to a Bloomberg News survey of 58 economists. Forty-eight percent say the FOMC will announce a third round of asset purchases at its Sept. 12-13 meeting.

The central bank will buy as much as $2 billion of Treasuries tomorrow maturing in February 2036 to May 2042. The purchases are part of the so-called Operation Twist that swaps short-term debt in the Fed’s holdings for longer maturities.

ECB Expectations

Demand for Treasuries was limited before the European Central Bank holds a policy meeting tomorrow amid speculation it will decide to buy sovereign debt in the euro region to lower government borrowing costs. ECB President Mario Draghi said on July 26 that the central bank is “ready to do whatever it takes to preserve the euro.”

Spain’s 10-year bond yields have pared their advance since climbing to a euro-era record of 7.75 percent on July 25, standing at 6.75 percent yesterday. The equivalent rate in Italy was at 6.08 percent, down from a six-month high of 6.71 percent touched a week earlier.

The ECB hasn’t settled any purchases of government bonds since March under its Securities Markets Program, in which the central bank intervenes in the euro region’s public and private debt markets.

“Action by Draghi is likely to drive down bond yields in Italy and Spain, which would spur risk-on sentiment and put upward pressure on Treasury yields,” said Mizuho’s Nakamura. “Any yield gain would be temporary and rates would resume their decline owing to the weak U.S. fundamentals in the long term.”

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net


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