U.S. Treasury 10-year notes broke their longest losing streak since October after the European Central Bank lowered interest rates with an unprecedented round of measures to ward off deflation, sparking a global rush for bonds.
Yields on the benchmark note fell for the first time in six days amid speculation the ECB’s move shows central banks are in no rush to withdraw record stimulus measures that have propped up demand for fixed-income assets. The rally in Treasuries comes a day before a report that economists forecast will show U.S. employment growth slowed in May. Bonds rose after the last two monthly employment reports were released.
“The relative-value favors U.S. dollar investments, given that the euro-zone is only beginning to embark on quantitative easing,” said Margaret Kerins, the Chicago-based head of fixed-income strategy at Bank of Montreal, one of 22 primary dealers that trade with the Federal Reserve. “The market is now focusing on payrolls tomorrow.”
The U.S. 10-year yield fell two basis points, or 0.02 percentage point, to 2.58 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It rose as high as 2.64 percent, the most since May 13. The 2.5 percent note maturing in May 2024 rose 5/32, or $1.56 per $1,000 face amount, to 99 9/32.
The 10-year note yield advanced the previous five days and has climbed 18 basis points since touching 2.4 percent on May 29, the lowest level since June 2013.
Benchmark U.S. 10-year notes yield 1.18 percentage points more than 10-year German bunds, helping fuel demand for Treasuries on a relative-value basis. The gap was 1.21 percentage points on April 17, which was the most since October 2005, amid the Fed’s push to raise interest rates by 0.25 percentage point at 17 consecutive meetings before stopping at 5.25 percent in June 2006.
Treasuries dropped briefly as the ECB President Mario Draghi cut the deposit rate to minus 0.1 percent and said the bank will introduce new, “targeted” offerings of liquidity to banks to encourage them to lend money to the real economy. Officials will also start work on purchases of asset-backed securities, he said.
“We decided on a combination of measures to provide additional monetary policy accommodation and to support lending to the real economy,” Draghi told reporters in Frankfurt.
U.S. two-year yields at 0.38 percent were about 33 basis points more than those on similar-maturity German debt, almost the widest since 2007, according to closing-price data compiled by Bloomberg.
“It helps send the message that central banks around the world are more concerned with deflation than inflation,” said Kathy Jones, a fixed-income strategist at Charles Schwab & Co. in New York. “For us, it means a steeper yield curve.”
Schwab recommends clients hold Treasuries as part of their core fixed-income portfolios.
The Fed is tapering its monthly asset purchases as officials debate an exit to its ultra-loose monetary policy. The central bank will announce its next policy decision on June 18 after signaling at its April 29-30 meeting that low rates would persist for a “considerable time.”
Futures prices put the likelihood the Fed will start raising borrowing costs by its June 2015 at 40 percent, based on trading on the CME Group Inc.’s exchange. The chances of a central-bank increase are 60 percent by its July 2015 meeting, the data show.
Treasuries fell earlier after the four-week average for jobless claims fell to 310,250 in the period ended May 31, the lowest since June 2007, a Labor Department report showed in Washington. The number of applications last week climbed to 312,000 from 304,000, in line with the median forecast of economists surveyed by Bloomberg.
A U.S. Labor Department’s nonfarm payrolls report tomorrow will show employers added 215,000 jobs in May, according to the median forecast in a Bloomberg News survey of 91 economists, down from April’s 288,000 gain that was the most since January 2012.
Treasuries still rose three basis points after the May 2 payrolls report, as average hourly earnings remained unchanged in April compared with a median forecast for a 0.2 percent increase. U.S. government debt also advanced on April 4, after March gains trailed forecasts. U.S. government debt fell March 7 on a stronger-than-estimated increase in employment.
The Bank of America Merrill Lynch MOVE Index, which measures price swings based on options, climbed four basis points to 64.9 basis points yesterday, the biggest gain since April 2.