Treasury 10-Year Yields Fall Below 3% for First Time in 2011 on Jobs Data

Treasuries rose, pushing 10-year note yields below 3 percent for the first time in 2011 after ADP Employer Services reported that U.S. companies added fewer jobs in May than economists forecast.

Yields dropped last month the most since August 2010 before the Labor Department’s payrolls report this week, which is forecast to show hiring slowed. U.S. manufacturing expanded at the slowest pace in seven months, a report today is forecast by economists to show.

“Clearly the ADP number was much weaker than expected, continuing a trend of weaker data over the last two weeks that seems to be getting worse,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The flight-to- safety trade is in full force because the number raises concern about the strength of Friday’s jobs data.”

Benchmark 10-year note yields dropped six basis points, or 0.06 percentage point, to 3 percent at 9:09 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent securities due in May 2021 increased 1/2, or $5 per $1,000 face amount, to 101 1/32. The yield slid to 2.9997 percent, the lowest level since Dec. 7.

Treasuries returned 1.6 percent in May, the most since August, according to Bank of America Merrill Lynch indexes, as Europe’s sovereign-debt crisis and a weakening U.S. economy fueled demand for government debt.

Company Hiring

Companies in the U.S. added 38,000 workers in May compared with the addition of 177,000 in the previous month, ADP reported today. The median forecast of 37 economists in a Bloomberg News survey was for an increase of 175,000.

“The headline was pretty terrible,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of 20 primary dealers that trade directly with the Fed. “Ten-year notes have bounced off of the 3 percent level as there is still a lot of other data to give the market direction this week.”

Employers added 180,000 positions last month after an increase of 244,000 in April, the Labor Department is forecast by economists to report June 3. The unemployment rate may have fallen to 8.9 percent to 9 percent.

The Institute for Supply Management’s factory index probably decreased to 57.1 last month from 60.4 in April, according to the median forecast of economists before today’s report from the Tempe, Arizona, group. Figures greater than 50 signal expansion.

Break-Even Rate

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt known as the break-even rate, fell to 2.22 percentage points today, the narrowest since January.

The Fed plans to buy $6 billion to $8 billion of debt maturing from December 2016 to May 2018 today to support the economy under its $600 billion program of quantitative easing, which expires this month.

Futures contracts show that the likelihood of a Fed rate increase by March 2012 has dropped to 26 percent from 44 percent a month ago. The central bank has kept its target for overnight lending in a range of zero to 0.25 percent since December 2008.

Deutsche Bank AG, a primary dealer, said the end of the central bank’s bond-buying program may send stocks lower, maintaining demand for Treasuries.

“The risks are tilted towards a decline in equities,” analysts including Peter Hooper, Torsten Slok, Joseph Lavorgna, and Carl Riccadonna wrote in a report yesterday. “This argues for the Fed staying on hold and long rates staying low.”

Treasury gains will still give way to losses later this year, according to economists’ estimates. Yields will advance to 3.82 percent by Dec. 31, according to the average forecast in a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

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

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