Treasuries Gain After Jobs Increase Falls Below Forecasts

Treasuries rose, with 10-year note yields falling the most since December, as less-than-forecast job growth renewed speculation the Federal Reserve will provide more monetary stimulus to support the economic recovery.

The benchmark note gained for a third consecutive week after the Labor Department said yesterday that employers added 120,000 jobs in March and the jobless rate fell to 8.2 percent. Treasuries rallied on concern the European debt crisis is worsening as rising borrowing costs make it more difficult to finance deficits in nations such as Spain. The U.S. will sell $66 billion in three-, 10-, and 30-year debt next week.

“Things were not quite as rosy as previous numbers led us to believe, and we are seeing some payback for that,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “One number won’t determine the Fed’s action, but it does give them more cover to remain dovish.”

The benchmark 10-year note yield fell this week 15 basis points, or 0.15 percentage point, to 2.05 percent in New York, according to Bloomberg Bond Trader prices. Thirty-year bond yields fell 12 basis points, the most since December, to 3.22 percent.

The increase in payrolls, the fewest in five months, followed a revised 240,000 gain in February that was bigger than first estimated, Labor Department figures showed in Washington. The March increase was less than the most pessimistic forecast in a Bloomberg News survey, in which the median estimate called for a 205,000 rise.

Additional Stimulus

Unemployment fell to the lowest since January 2009, from 8.3 percent. The data also showed Americans worked fewer hours and earned less on average per week.

Investors continue to price in some probability that the Fed may initiate a third round of asset purchases, or quantitative easing, amid signs that the pace of the recovery remains subject to risks, including rising oil prices and continued turmoil in Europe.

“A couple of members” of the Federal Open Market Committee indicated that additional stimulus could become necessary if the economy lost momentum or if inflation stayed below 2 percent, according to minutes of its March 13 meeting released April 3. Fed Chairman Ben S. Bernanke said last week that, while he’s encouraged by the unemployment rate’s decline, continued accommodative monetary policy will be needed to make further progress.

‘On the Table’

“QE3 is firmly on the table again,” said Alan De Rose, head of Treasury trading at Oppenheimer & Co. Inc. “In terms of the economic backdrop, it’s not as strong as many people thought.”

After buying $2.3 trillion of assets to support the economy in two rounds of quantitative easing from December 2008 to June, the central bank has been replacing shorter maturities in its holdings with longer-term debt to cap borrowing costs without increasing holdings on its balance sheet. The $400 billion program, known as Operation Twist, is due to end in June.

The 10-year yield rose 10 basis points to 1.92 percent Feb. 3 after Labor Department data showed the economy added 200,000 jobs, 60,000 more than the consensus forecast. The yield fell 14 basis points to 1.99 percent on Sept. 2 after the government said there had been no job growth in August, compared with a forecast for a gain of 68,000 positions.

‘In Play’

“It keeps the Fed in play,” said Jason Brady, who manages bonds in Santa Fe, New Mexico, at Thornburg Investment Management, which oversees $72 billion. “We had bought into a story, as a market, that was about continuous improvements in the employment situation. This definitely puts that into question.”

The Treasury Department will sell $32 billion in three-year notes, $21 billion in 10-year notes, and $13 billion 30-year bonds from April 10 to April 12.

Yields fell earlier in the week after Spain’s borrowing costs climbed as the yield on the country’s 10-year bonds gained 13 basis points to 5.82 percent. The yield difference, or spread, between Spanish 10-year securities and similar-maturity German bunds rose to more than 400 basis points for the first time since Dec. 12.

Spain, the euro region’s fourth-largest economy, is in “extreme difficulty,” Prime Minister Mariano Rajoy said April 4, raising the likelihood of a bailout for the second time this week. ECB President Mario Draghi said April 4 that the economic outlook remained subject to “downside risks.”

Ten-year yields will increase to 2.51 percent by year-end, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings.

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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