U.S. 30-Year Yield Falls to January 2009 Low as August Employment Stalls
Treasuries rose, pushing 10-year note yields below 2 percent, as the government’s payrolls report showed no jobs were added in August, stoking speculation that the Federal Reserve will increase its purchases of longer- maturity debt.
U.S. 30-year yields fell to the lowest in since January 2009 as U.S. employment data were the weakest reading since September 2010. Minutes of the Federal Reserve’s Aug. 9 meeting released on Aug. 30 showed policy makers will debate stimulus options at their September gathering. German government debt rallied and credit defaults swaps rose, reflecting concern the European debt crisis is worsening.
“The markets were expecting some positive rate of job growth, and with that not materializing, everyone wants the safety of Treasuries,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The nonexistent job growth has decreased fear of inflation and replaced it with increased fear of recession.”
The 10-year note yield fell 14 basis points, or 0.14 percentage point, to 1.99 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.125 percent security maturing in August 2021 rose 1 9/32, or $12.81 per $1,000 face amount, to 101 8/32. The yield touched 1.9806 percent.
Thirty-year bond yields fell 20 basis points to 3.30 percent and two-year note yields rose two basis points to 0.20 percent.
The rally in Treasuries comes after government bonds returned 2.8 percent in August, the most since the depths of the financial crisis in December 2008, according to a Bank of America Merrill Lynch index. U.S. government debt has returned 7.4 percent this year, compared with a 1.77 percent drop in the Standard & Poor’s 500 Index.
Benchmark 10-year yields declined 57 basis points last month, the most since a 71 basis-point drop in December 2008, touching a record low of 1.97 percent on Aug. 18. Two-year notes have hovered at almost the record low 0.1568 percent after the Fed pledged Aug. 9 to keep the fed funds rates in a zero to 0.25 range until at least mid-2013.
The rally comes as bond investors have reduced their expectations for inflation as breakeven rates on Treasury Inflation-Protected Securities, or TIPS, are hovering near the lowest since October 2010. The breakeven inflation rate, calculated from yield differences on 10-year Treasury notes and inflation-indexed U.S. government bonds of similar maturity, has fallen to 2.04 percent from a high this year of 2.65 percent reached on April 11.
“The U.S. economy is dead in the water,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “The Treasury market is rallying. The hurdle was high for more accommodation, but it’s not as high anymore.”
The yield curve, the difference between two- and 30-year Treasury debt, narrowed to 310 basis points, the least in a year, as the jobless data bolstered the view that Fed Chairman Ben S. Bernanke will be inclined to take addition steps beyond the two previous rounds of debt buying, known as quantitative easing, or QE.
Pacific Investment Management Co.’s Bill Gross said he favors longer-maturity debt with the Fed likely to seek to narrow the difference between short-and long-term borrowing rates as employment growth stagnates.
“We’ve advocated hard duration, that basically means something beyond five years,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The front end of the curve, in the U.S. at least, is inert. You have to move out into longer duration, harder duration.’
European sovereign default risk rose to a record after the U.S. jobs data. The Markit iTraxx SovX Western Europe Index of credit-default swaps insuring the debt of 15 governments rose 11 basis points to 310 at in London, surpassing an all-time high closing price of 308 on Aug. 26.
Greece’s two-year notes extended their decline, pushing the yield on the securities up to a euro-era record 46.5 percent in London. Germany’s 10-year bond yield dropped to the lowest since at least 1999 when the euro was introduced, touching 1.996 percent.
U.S. payrolls were unchanged last month after an 85,000 gain in July that was less than initially estimated, Labor Department data showed today in Washington. The median forecast in a Bloomberg News survey called for a rise of 68,000. The unemployment rate was unchanged at 9.1 percent.
The Office of Management and Budget said in an update of its economic forecasts through August that the jobless rate will average 9.1 percent in 2011 and 9 percent next year. President Barack Obama will address a joint session of Congress on Sept. 8 on his plans to boost jobs and accelerate growth.
Data yesterday showed the Institute for Supply Management’s factory index fell to 50.6 last month, the lowest level since July 2009, from 50.9 in July, the Tempe, Arizona-based group said today. Economists projected the gauge would drop to 48.5, according to the median forecast in a Bloomberg News survey. Figures greater than 50 signal expansion.
“There isn’t much on the calendar that can materially affect the now-lowered economic outlook for the rest of 2011 and into 2012, which means rates should stay low within a range” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It certainly provides cover for the Fed if they want to do more on the accommodation front.”
Minutes from the Fed’s Aug. 9 meeting released this week showed some policy makers urged action to stimulate a sluggish economy. A few Fed policy makers, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge to hold its key interest rate at a record low at least until mid-2013, the minutes said.
Fed officials discussed a range of tools, including buying more government bonds to bolster the economy without coming to an agreement on what they might do next should the economy weaken further. They will more fully debate their options when they gather Sept. 20-21 for a two-day meeting that was originally scheduled to last one day.
“Bernanke is going to have to carry the world on his shoulders here, and everyone’s going to be looking for him and the Fed to begin to deploy QE3 now,’ said Richard Schlanger, a money manager at Pioneer Investments in Boston, which invests $20 billion in fixed-income securities. “These are definitely shaky times. That’s why Treasuries continue to rally.”
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