Treasury Two-Year Note Yield Drops to Record Low After Philly Fed Decline

U.S. two-year note yields fell to a record low after the Federal Reserve Bank of Philadelphia’s general economic index dropped and weekly unemployment claims unexpectedly rose, adding to evidence of a faltering recovery.

Yields on the securities dropped below 0.48 percent for the first time as the Philadelphia bank’s index unexpectedly fell to the lowest level since August 2009. The Fed purchased $3.609 billion in Treasuries as part of the program restarted this week to keep borrowing costs low to foster economic growth. The U.S. will sell $102 billion of 2-, 5- and 7-year notes next week, the fourth straight monthly reduce in the combination of maturities.

“Sentiment shifted drastically in the face of weakness from the economic reports,” said Bulent Baygun, head of interest-rate strategy in New York at BNP Paribas SA, one of 18 primary dealers that trade directly with Fed. “More people believe that the Fed won’t be able to hike rates for a really long time. The back end is higher because of yield grab.”

The two-year note yield fell 2 basis points to 0.48 percent at 1:30 p.m. in New York, after dropping to 0.4715 percent, the lowest level since the Treasury began regular sales of the securities in 1975. The 30-year bond yield touched 3.62 percent, the lowest level since April 2009, according to BGCantor Market Data.

The Philadelphia Fed index fell to minus 7.7 this month from 5.1 in July. A survey had forecast a rise to 7.2, according to the median estimate of 56 economists in a Bloomberg survey. Readings above zero signal growth in the regional gauge, which covers eastern Pennsylvania, southern New Jersey and Delaware.

Fed Purchases

“The headline and details of this report are truly terrible,” David Semmens, an economist with Standard Chartered Bank in New York, wrote in a note to clients. It raises concerns about the robustness of the recovery in the second half of the year, he wrote.

The Fed’s purchases today bring to $6.16 billion the amount of Treasuries the central bank has bought since it began the program on Aug. 17. Seven of the 27 Treasury maturities listed for possible purchase, due in November 2016 to May 2017, were acquired, the New York Fed said in a statement today.

“They’re avoiding issues that they have significant holdings in,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The exclusions list maps almost perfectly with the issues they have 35 percent or near 35 percent holdings in.”

The Treasury’s sale of $102 billion of 2-, 5- and 7-year notes next week will be the smallest monthly offering of the combination since May 2009. It will also sell $7 billion in 30- year Treasury Inflation Protected Securities.

Applications for unemployment benefits in the U.S. unexpectedly increased last week to the highest level since November, showing companies are stepping up the pace of firings as the economy slows.

‘Double-Dip’

“We continue to see weakness in the numbers,” said Sean Murphy, a trader at Societe Generale SA in New York. “It’s supporting the idea we could slip into a double-dip” recession, he said.

Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance fell, while those getting extended benefits increased.

The index of U.S. leading indicators rose in July for the second time in four months, extending a see-saw pattern that indicates slower growth through the end of the year.

The Conference Board’s gauge of the outlook for the next three to six months matched a median forecast of 58 economists in a Bloomberg News survey that had predicted a rise of 0.1 percent after falling 0.3 percent in June.

Faltering Recovery

Treasuries rallied this year on concern the U.S. economic recovery is faltering.

U.S. gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.

An index of global sovereign bonds has returned 5.9 percent this year, data compiled by Bank of America Merrill Lynch shows, as investors sought the relative safety of bonds. MSCI’s World Index of shares handed investors a 2.2 percent loss after accounting for reinvested dividends. Corporate bonds returned 8.1 percent globally this year, a separate Merrill Lynch index showed.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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