The Treasury 10-year note yield fell to the lowest in four weeks as investors sought the safety of U.S. debt amid concern the global recovery is slowing.
U.S. yields tumbled April 6, when a Labor Department report showed jobs growth fell short of forecasts in March, spurring speculation the Federal Reserve may be more likely to initiate a third round of asset purchases, a policy known as quantitative easing. Investors prepared to bid at three sales of coupon- bearing debt totaling $66 billion starting tomorrow.
“It creates this back and forth with what the Fed may or may not do,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. Additional weakness in job growth indicates “the Fed probably is going do something, so the market rallies off it,” he said.
U.S. 10-year yields fell one basis point, or 0.01 percentage point, to 2.05 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2022 gained 2/32, or 63 cents per $1,000 face amount, to 99 18/32. The yield declined to as low as 2.02 percent, the least since March 12. It dropped 15 basis points last week, the most since the period ended Dec. 16.
The 30-year bond yield touched 3.17 percent, the lowest since March 13.
The Standard & Poor’s 500 Index dropped 1.1 percent, reaching the lowest level since March 13.
The difference between 10-year yields on conventional U.S. government securities and Treasury Inflation-Protected Securities narrowed to 2.24 percentage points, the smallest since March 7. The gap, known as the breakeven spread, is a projection of the rate of inflation during the life of the debt.
The gap between yields on Treasuries maturing in two and 10 years narrowed to 1.73 percentage points, the least since March 12, the day before the Fed upgraded its assessment of the U.S. economy.
This week’s three three-, 10- and 30-year securities auctions will raise $23.1 billion of new cash as maturing securities held by the public total total $42.9 billion.
U.S. 10-year note yields will reach 2.56 percent by the end of the year, according to weighted average in a Bloomberg News survey of analysts.
Employers added 120,000 jobs in March and the jobless rate fell to 8.2 percent, the Labor Department said April 6. The median forecast in a Bloomberg News survey was for a 205,000 rise. The report underscores Fed Chairman Ben S. Bernanke’s concern that recent gains may not be sustained without a pickup in growth.
The central bank on March 13 reiterated its previous statement that economic conditions would probably warrant “exceptionally low” interest rates at least through late 2014. It has kept its target rate for overnight bank loans to a range of zero to 0.25 percent since December 2008.
The Fed sold $1.26 billion of TIPS today maturing from July 2012 to January 2015 as part of a program to replace $400 billion of shorter-term debt in its holdings with longer maturities to cap borrowing costs.
The increase in payrolls was the smallest in five months, and was less than the most pessimistic forecast in a Bloomberg News survey in which the median estimate called for a 205,000 rise. Unemployment fell to 8.2 percent, the lowest since January 2009, from 8.3 percent.
The slowing pace of employment gains indicates it’s too early to declare the economy self-sustaining, according to Pacific Investment Management Co.’s Mohamed A. El-Erian.
“We have structural problems all over our economy,” El- Erian, chief executive officer at Pimco in Newport Beach, California, said in an “In the Loop” interview with Betty Liu on Bloomberg Television. “The duration of unemployment is at record highs. When it comes to hiring for future business, companies are still hesitant.”
“People have slightly adjusted their probabilities toward QE3,” said Aaron Kohli, an interest-rate strategist BNP Paribas in New York, one of 21 primary dealers that trade with the Fed. “The Fed’s done a very good job of indicating to the street they’re very data dependent, and that’s what everyone’s responding to.”
Consumer prices excluding food and energy likely rose 2.2 percent for the 12 months ended March, matching the result for February, the Labor Department in Washington is likely to say April 13, according to the median forecast of 26 economists in a Bloomberg News survey.
Prices including more volatile energy and food costs, likely rose 2.7 percent for the period ended March, down from 2.9 percent for 12 months ended February.
Buyers bid $3.19 for each dollar of the $538 billion in notes and bonds sold this year, the most since the government began releasing the data in 1992 and on pace to beat the high of $3.04 in 2011.
The net supply of Treasuries, or gross issuance minus the amount of maturing debt, will fall by an average of $32.5 billion a month this year, to $77.3 billion, which will leave an average of $99.4 billion of investable cash a month from maturing debt, up from $68.1 billion in 2011, according to Ian Lyngen, a strategist in Stamford, Connecticut, at CRT Capital Group and part of a team led by David Ader which has been ranked first by Institutional Investor magazine in government-debt strategy for the past six years. This comes as government sales stay relatively constant at about $176.75 billion a month, he said.
“The refining of economic expectations has put in a bid for Treasuries and this will likely be supportive for auctions later this week,” Lyngen said.