Treasuries Decline as Companies Added More Jobs in August Than Forecast
Sept. 3 (Bloomberg) -- Nouriel Roubini, chairman and co-founder of Roubini Global Economics LLC, talks about the outlook for the global economy and the possible impact of a double-dip recession or an increase in risk aversion on gold and currencies. He talks with Francine Lacqua in Cernobbio, Italy, on Bloomberg Television's "Countdown." (Source: Bloomberg)
Treasury two-year notes headed for their biggest weekly gain since June before a government report that economists said will show U.S. employers trimmed jobs for a third month.
Ten-year notes were also set for a weekly advance on speculation mounting employment losses will prompt the Federal Reserve to increase its Treasury purchases, a policy known as quantitative easing. A separate report today may show services, the biggest part of the economy, grew at a weaker pace.
“Unemployment in the U.S. is a huge topic and I don’t think the figure today will be very encouraging,” said Charles Berry, a bond trader at Landesbank Baden-Wuerttemberg in Stuttgart. “As long as the Fed keeps money cheap, and that’s likely to be the case for a while, and there’s speculation of further bond purchases, we are going to be in a low-yield environment for a long time.”
The two-year note yielded 0.5 percent as of 9:20 a.m. in London, after falling to a record 0.4542 percent on Aug. 24, according to data compiled by Bloomberg. The 0.375 percent security due August 2012 traded at a price of 99 3/4.
The yield has fallen five basis points this week, on its way to the biggest weekly decline since the period ended June 25. Ten-year rates slipped three basis points this week to 2.62 percent.
U.S. employers cut 105,000 jobs in August, according to a Bloomberg News survey before the Labor Department report today. The U.S. lost 131,000 workers in July and 221,000 in June.
Northrop Grumman Shipbuilding said Aug. 25 it expects to trim 350 jobs at a facility in Mississippi. The company is a unit of Northrop Grumman Corp., the U.S. defense contractor.
Roubini’s View
New York University Professor Nouriel Roubini said that the U.S. economy is set to slow in the second half of this year as “tailwinds become headwinds.” He also said renewed quantitative easing won’t help the U.S. economy because banks are refusing to lend.
“Job creation is going to be very, very mediocre,” Roubini said in a Bloomberg Television interview in Cernobbio, Italy. “It’s going to feel like a recession even if we’re not in a recession.”
The Institute for Supply Management’s services gauge dropped in August to a six-month low of 53.2, according to a median forecast by economists in a Bloomberg survey.
Treasury 10-year yields declined nine basis points after the previous employment report on Aug. 6. The rally helped drive returns of 2.05 percent for Treasuries last month, the most since March 2009.
Fed Chairman Ben S. Bernanke said last month the central bank “will do all that it can” to ensure the recovery.
Bond bears say the worst of the economic slowdown is over.
“I trimmed my position this week,” said Takuya Yamamoto, who helps oversee $102 billion in assets as a portfolio manager in Tokyo at Diam Co., a unit of Japan’s second-largest life insurer. “The economy is bottoming now. The rally is over.”
Yield to Climb
The 10-year yield will climb to 3 percent by year-end, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.
U.S. economic growth will quicken to 2.5 percent in the third quarter from 1.6 percent in the previous three months, another survey showed.
Yields indicate banks are becoming more willing to lend. The three-month London interbank offered rate for dollars, known as Libor, fell to 0.29 percent yesterday, the least since April.
The extra yield investors demand to hold 10-year notes over two-year debt was 2.12 percentage points, after widening yesterday to 2.14 percentage points, the most since Aug. 23.
The “steepening bias” in the market “is likely anticipatory to next week’s supply,” analysts led by Chris Ahrens, an interest-rate strategist at UBS AG in Stamford, Connecticut, wrote in a research note yesterday.
Debt Sales
The government will sell $33 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds next week, the Treasury announced yesterday. The total of $67 billion is the smallest combination of the maturities since July 2009. The amount was $74 billion in August and a record-tying $81 billion in February.
Japanese investors are scooping up record amounts of bonds sold by the World Bank and state-backed lenders, seeking higher returns as government debt yields tumble.
Kokusai Global Sovereign Open, Asia’s biggest bond fund, boosted holdings of such securities, known as supranational bonds, to 8.2 percent of its portfolio, the most ever. Mitsubishi UFJ Asset Management Co. started four funds that invest in the debt and Diam is attracting record amounts earmarked for the notes. Japanese investors bought an unprecedented 2.18 trillion yen ($25.9 billion) net amount of overseas debt in the week ended Aug. 13.
TIPS Difference
Japan’s fund managers, who purchased more Treasuries than the Chinese this year, are seeking top-rated debt as yields fall around the world. The World Bank’s 7.625 percent bonds due in 2023 yield 3.27 percent versus 1.11 percent in Japan.
Traders are cutting bets on U.S. inflation.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.62 percentage points from this year’s high of 2.49 percentage points in January.
At a 10-year TIPS sale yesterday, investors bid for 2.80 times the amount of debt on offer, the least since January.
TIPS have returned 5.8 percent this year, compared with an 8 percent gain for the broader Treasury market, according to Bank of America Merrill Lynch indexes.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.
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