Treasuries Advance After BOJ Says U.S. Economic Uncertainty Is Increasing
Treasuries gained, erasing last week’s losses, before reports later this week forecast by economists to show U.S. employers eliminated jobs in August for a third straight month and manufacturing growth slowed.
Government debt rallied earlier as the Bank of Japan said “uncertainty” regarding the U.S. economy is mounting. The two- year note yield rose from almost a record low on Aug. 27 after Federal Reserve Chairman Ben S. Bernanke tempered speculation that the central bank will step up debt buying when he said policy makers would provide additional stimulus as needed.
“It’s a defensive tone going into the payroll numbers,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers that trade directly with the Fed. “It’s a short-covering bid.” A short is a bet that the price of a security will fall.
The 10-year note yield fell 12 basis points, or 0.12 percentage point, to 2.53 percent at 4:07 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 rose 1 1/32, or $10.31 per $1,000 face amount, to 100 26/32.
The yield, which has dropped 38 basis points in August, increased 3 basis points last week in its first five-day gain since July. It touched 2.4158 percent on Aug. 25, a 19-month low. The two-year note yield climbed 6 basis points last week in the biggest gain since April. It touched the record low of 0.4542 percent on Aug. 24.
‘Change to Reload’
“People are looking at it as a chance to reload after Friday’s sell-off,” said George Goncalves, head of interest- rate strategy in New York at Nomura Holdings Inc., another primary dealer.
Treasuries have returned 1.2 percent in August, which would be a fifth monthly gain, according to Bank of America Merrill Lynch indexes. That would be the longest winning streak since the period ended March 2008, when mounting credit-market losses set the economy on course for a recession.
Employers eliminated 100,000 positions in August after a reduction of 131,000 in the previous month, according to the median forecast of 72 economists in a Bloomberg News survey before the Labor Department’s payrolls report Sept. 3. The unemployment rate probably increased to 9.6 percent this month from 9.5 percent.
Manufacturing Gauge
The Institute for Supply Management’s gauge of manufacturing dropped in August to 52.8, according to the median forecast of 77 economists. Figures greater than 50 signal expansion. The report from the Tempe, Arizona-based organization is due Sept. 1.
“Until more evidence tips over toward a bearish outlook for bonds, we recommend going against the party-is-over technicians,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients. “This market has seen numerous ‘I told you so’ sell-offs.”
Treasuries rose earlier as the Bank of Japan expanded a bank-loan program by 10 trillion yen ($118 billion) after an emergency meeting in the wake of the yen’s reaching a 15-year high against the dollar last week.
“Uncertainty about the future, especially for the U.S. economy, has heightened more than before,” the central bank said. “In these circumstances, the bank judged it is necessary to pay more attention to the downside risks to the outlook for Japan’s economic activity and prices.”
Slower Growth
Figures from the Commerce Department released Aug. 27 indicated the world’s largest economy grew at a 1.6 percent annual rate in the second quarter, less than the government previously estimated.
At a Jackson Hole, Wyoming, conference attend by global central bankers, Bernanke said that day that growth during the past year has been “too slow” and unemployment “too high.” He also said a handoff from fiscal stimulus and inventory restocking to consumer spending and business investment “appears to be under way.”
Treasuries also rose today as investors purchased longer- term securities to increase the duration of their portfolios to match their benchmarks at the end of the month.
U.S. government debt extension increased by 0.12 years for Sept. 1, up from the 0.06 years for Aug. 1, according to the primary dealer Barclays Plc. Duration measures how sensitive a bond’s price is to changes in yield.
Treasuries are poised to fall over the near term, and investors should wait until the 10-year note yield climbs to 2.87 percent before beginning to buy again, according to Royal Bank of Scotland Group Plc.
‘Needed’ Correction
“A needed bull-market correction in Treasuries has begun,” wrote William O’Donnell, managing director in Stamford, Connecticut, at the primary dealer RBS Securities Inc., in a research note today. “The long-term trend for bonds is still bullish, but we need to flare out excesses in bullish sentiment and positioning to get to a more solid footing.”
The weekly 10-year note yield formed a “hammer bottom” on Aug. 27, a “classic” indication of an impending trend change, according to O’Donnell. On a candlestick chart, a hammer bottom has a thick, short upper segment atop a long, thin segment, resembling a hammer.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
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