Treasuries Poised for Biggest Weekly Advance Since Fed Rate Cut in 2008

Treasury 10-year notes headed for the steepest weekly gain since the last time the Federal Reserve cut interest rates in 2008 as concern the global recovery is faltering stoked demand for the safest assets.

Benchmark yields touched the lowest level in almost a year, while two-, five and 30-year debt also advanced in the past five days. Bonds surged from Japan to Australia to Germany this week as investors sought the relative safety of government securities as stock markets plunged around the world. Payrolls data today will show U.S. employers failed to create enough jobs to reduce unemployment, according to a Bloomberg News survey.

“Safe-haven demand is seeing a lot of players move into the Treasury market,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. “People are getting concerned about the weak economic data, there seem to be very few silver linings out there. The euro-zone crisis is also a big risk.”

The 10-year yield fell one basis point to 2.40 percent as of 9:41 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 traded at 106 9/32. The rate earlier fell to 2.34 percent, the least since October 2010.

The yield dropped 40 basis points this week, the most since the period ended Dec. 19, 2008, according to data compiled by Bloomberg. On Dec. 16 of that year, the Fed cut its target for overnight bank lending to a range of zero to 0.25 percent, a record low, to support the economy.

Bond Surge

Bonds are surging on concern a weakening U.S. economy and spreading debt problems in Europe will prompt the Federal Reserve to provide additional monetary stimulus to bolster growth in the world’s biggest economy.

“Hot money is flowing into U.S. Treasuries in a flight to quality,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $37.9 billion and is a unit of Japan’s second-largest bank. “All bonds are benefiting.”

The 10-year Treasury yield will drop to 2.2 percent by year-end, Nakamura said. It fell past his prior forecast of 2.5 percent yesterday. Mizuho Asset bought Treasuries due in 10 years to 20 years this week, he said.

Two-, Five-Year Debt

Two-year yields climbed two basis points to 0.27 percent, after setting a record low 0.2527 percent yesterday. In the week, the two-year note yields have fallen eight basis points.

Five-year yields increased three basis points to 1.12 percent, paring their decline this past week to 24 basis points. Yields on 30-year bonds rose one basis point to 3.69 percent, having fallen 43 basis points this week.

U.S. payrolls rose by 85,000 last month after an 18,000 gain in June, according to the median forecast of economists surveyed by Bloomberg before today’s Labor Department report. The jobless rate held at 9.2 percent, a separate survey showed.

Treasuries have returned 3.67 percent in the past month as of yesterday, based on Bank of America Merrill Lynch data. An index of bonds around the world gained 2.04 percent in the period, Bank of America Merrill Lynch indexes show.

The MSCI All Country World Index of stocks has handed investors an 11 percent loss in the month ending today. The index dropped 4.08 percent yesterday, the most since 2009.

World ‘Panicking’

“The whole world is panicking,” Marc Faber, publisher of the Gloom, Boom & Doom report, said in an interview today on Bloomberg Television. Stocks are “extremely oversold,” he said, speaking from Zurich.

European Central Bank President Jean-Claude Trichet said yesterday the ECB has resumed bond purchases and will offer banks more cash to stop a debt crisis in the region from engulfing Italy and Spain.

Japan’s 10-year bond yields slid as low as 0.985 percent today, the least this year, after the central bank yesterday expanded its asset-purchase fund.

“Fear and panic are driving the markets,” said Shinji Nomura, chief debt strategist in Tokyo at SMBC Nikko Securities Inc., one of the 25 primary dealers obliged to bid at government debt sales. “I’m bearish on Japan’s bonds with 10-year yields below 1 percent.”

Australia’s 10-year rate fell to 4.42 percent today, a two- year low. The yield on same-maturity German bonds dropped to 2.285 percent yesterday, a level not seen since October.

Risk Premium

Yields show investors are demanding greater compensation to lend to banks and companies, though the amounts have yet to approach the levels seen when credit markets froze in 2008.

The three-month London interbank offered rate for dollars rose to 0.27 percent yesterday, the most since May, as banks charge more to lend to each other. The rate surged to 4.82 percent in October 2008.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 26.94 basis points, the most in a year.

Swap Rates

The difference, or spread, between two-year swap rates and comparable-maturity Treasury yields was 25.56 basis points, versus the average for the past year of 20.44 basis points. It is down from this year’s highest close of 31 set June 24 and below the level of 52.25 in May 2010, when the extent of fiscal troubles in Greece came to light.

Rates on the highest-ranked 30-day commercial paper averaged 19 basis points, compared with 22 basis points at the start of 2011 and last year’s high of 44 in July, according to yields offered by companies and compiled by Bloomberg.

“Bonds are looking very overpriced but they’ve been the right place to be,” Geoff Lewis, the Hong Kong-based head of investment services at JP Morgan Asset Management, said in an interview today on Bloomberg Television.

To contact the reporters on this story: Garth Theunissen in London gtheunissen@bloomberg.net Wes Goodman in Singapore at wgoodman@bloomberg.net

To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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