Treasury Two-Year Notes Advance as Employers Add Fewer Jobs Than Forecast

Treasury 2-year note yields fell after U.S. employers added fewer jobs in November than economists forecast and the unemployment rate unexpectedly rose, reigniting concern the pace of the economic recovery will slow.

Government notes maturing in five years and less gained for the first time in three days as the 39,000 increase in jobs underscored the Federal Reserve’s decision to use a policy of quantitative easing to pump money into the economy. The central bank bought $6.8 billion of Treasuries as part of its $600 billion plan to keep borrowing costs low. Longer-maturity debt fell after a report showed service industries expanded in November at the fastest pace in six months.

“We’ve rallied in the front-end, reflecting some of pessimism that the report provided and a realization that the Fed will have support to not decrease the pace of QE anytime soon,” said Eric Lascelles, chief rates strategist and economist at Toronto-Dominion Bank’s TD Securities unit in Toronto.

The yield on the 2-year note fell seven basis points, or 0.07 percentage point, to 0.47 percent at 5:06 p.m. in New York, according to BGCantor Market Data. The price of the 0.5 percent security maturing in November 2012 rose 4/32, or $1.25 per $1,000 face amount, to 100 1/32.

Ten-year note yields rose two basis points to 3.01 percent after touching 3.04 percent, the highest since July 28, and as low as 2.9 percent. Thirty-year yields increased six basis points to 4.32 percent, the highest since Nov. 18.

Yield Spreads

The extra yield investors pay to hold 10-year notes over two-year debt widened for a fourth straight day to 2.54 percentage points, the steepest yield curve since June.

“There is there is still a lot of good news out there, which has kept the longer-end higher in yield,” Lascelles said.

Investment-grade corporate bond yields climbed to the highest since August, according to Bank of America Merrill Lynch’s U.S. Corporate Master Index. Yields yesterday breached the 4 percent threshold for the first time since Aug. 5, climbing to 4.011 percent.

Bill Gross, manager of the world’s largest bond fund at Pacific Investment Management Co., said the Fed is unlikely to raise interest rates for several years with employment growing less than forecast.

“The front part of the curve is the safe part of the curve” with policy makers forced to keep their target rate near zero to sustain growth, Gross said in a radio interview on “Bloomberg Surveillance” with Tom Keene. The difference between 2-and 10-year notes is known as the yield curve.

Jobs Pattern

Payrolls increased less than the most pessimistic projection of economists surveyed by Bloomberg News, after a revised 172,000 gain the prior month, Labor Department figures showed today in Washington. The median forecast of 87 economists in a Bloomberg News survey was for 150,000 more jobs. The jobless rate rose to 9.8 percent, the highest since April.

The Institute for Supply Management’s non-manufacturing index, which covers about 90 percent of the economy, rose to 55 last month from 54.3 in October. A reading higher than 50 signals growth.

“The market has seen a lot of good economic news lately and the jobs report was the first to that bucked the trend of good economic data,” said Kevin Flanagan, a Purchase, New York- based chief fixed-income strategist at Morgan Stanley Smith Barney. “But the market has discounted it some as we’ve avoided a double dip and are seeing some momentum, even if it is slow, so they are not reading into the jobs number very much at this state.”

Hedge Switch

Hedge-fund managers and other large speculators reversed from a net-long position to a net-short position in 10-year note futures in the week ending Nov. 30, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 67,655 contracts on the Chicago Board of Trade. Last week, traders were net-long 27,281 contracts.

Fed policy makers on Nov. 12 started a $600 billion second round of asset purchases to support growth in the economy and to reduce unemployment and avert deflation. The U.S. central bank today bought Treasuries maturing from June 2013 to November 2014, according to the New York Fed’s website.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has widened to 2.2 percentage points from this year’s low of 1.51 percentage points in August. The five- year average was 2.089 percentage points.

The 10-year note yield will end the year at 2.64 percent, according to the average forecast in a Bloomberg News survey of 63 banks and securities companies, with the most recent estimates given the heaviest weightings. The two-year note yield is expected to end 2010 at 0.5 percent.

Next week’s government debt sales will include $32 billion of three-year notes on Dec. 7, $21 billion of 10-year securities the following day and $13 billion of 30-year bonds on Dec. 9.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net;

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

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