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Treasury 2-Year Note Yield Drops to Record as Recovery Falters

Aug. 19 (Bloomberg) -- U.S. two-year note yields fell to a record low after the Federal Reserve Bank of Philadelphia’s general economic index dropped and weekly unemployment claims unexpectedly rose, adding to evidence of a faltering recovery.

Yields on the notes dropped below 0.48 percent for the first time as the index unexpectedly fell to the lowest level since August 2009. The Fed bought $3.609 billion in Treasuries as part of the program restarted this week to keep borrowing costs low to foster economic growth. St. Louis Fed President James Bullard said the Fed should buy more Treasuries if the weakening economy shows slowing inflation.

“The weaker than expected figures from the Philadelphia Fed and the jobless claims combined have brought up fears of a double dip, a slower economy and potentially deflation,” said Ira Jersey, an interest-rate strategist at Credit Suisse Group AG, one of 18 primary dealers that trade directly with the central bank. “Twos are going to 40 to 44 basis points by year-end because the Fed is on hold for the next two years.”

The two-year note yield fell 1 basis point to 0.49 percent at 4:12 p.m. in New York, after dropping to 0.4715 percent, the lowest level since the Treasury began regular sales of the securities in 1975. The 30-year bond yield fell 8 basis points to 3.65 percent and touched 3.62 percent, the lowest level since April 2009, according to BGCantor Market Data.

Treasury will sell $102 billion of 2-, 5- and 7-year notes next week, the fourth straight monthly reduce in the combination of maturities.

‘A Step Backwards’

The Philadelphia Fed index fell to minus 7.7 this month from 5.1 in July. A survey had forecast a rise to 7.2, according to the median estimate of 56 economists in a Bloomberg survey. Readings above zero signal growth in the regional gauge, which covers eastern Pennsylvania, southern New Jersey and Delaware.

Applications for unemployment benefits in the U.S. unexpectedly increased last week to the highest level since November, showing companies are stepping up the pace of firings as the economy slows.

“This is certainly a step backwards for the jobs market,” Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “Traders aren’t really all that worried about the short-term movements of the Treasury market because they think they are on the right side of the trade over the long term.”

Fed Buys Treasuries

The Fed’s purchases today bring to $6.16 billion the amount of Treasuries the central bank has bought since it began the program on Aug. 17. The central bank is seeking to keep debt in the System Open Market Account, or SOMA, at about $2.054 trillion by using the proceeds of principal payments from agency mortgage-backed securities and agency debt holdings while not exceeding its threshold for any one maturity.

“Should economic developments suggest increased disinflation risk, purchases of Treasury securities in excess of those required to keep the size of the balance sheet constant may be warranted,” Bullard said today in Rogers, Arkansas.

The Treasury’s sale of $102 billion of 2-, 5- and 7-year notes next week will be the smallest monthly offering of the combination since May 2009. It will also sell $7 billion in 30-year Treasury Inflation Protected Securities.

“We continue to see weakness in the numbers,” said Sean Murphy, a trader at Societe Generale SA in New York. “It’s supporting the idea we could slip into a double-dip” recession, he said.

Weekly Claims

Initial jobless claims rose by 12,000 to 500,000 in the week ended Aug. 14, Labor Department figures showed today in Washington. The number of people receiving unemployment insurance fell, while those getting extended benefits increased.

The index of U.S. leading indicators rose in July for the second time in four months, extending a see-saw pattern that indicates slower growth through the end of the year.

The Conference Board’s gauge of the outlook for the next three to six months matched a median forecast of 58 economists in a Bloomberg News survey that had predicted a rise of 0.1 percent after falling 0.3 percent in June.

Treasuries rallied this year on concern the U.S. economic recovery is faltering.

U.S. gross domestic product will expand at an average 2.55 percent annual rate in the last six months of 2010, according to the median of 67 estimates in a survey taken July 31 to Aug. 9, down from the 2.8 percent pace projected last month.

An index of global sovereign bonds has returned 5.9 percent this year, data compiled by Bank of America Merrill Lynch shows, as investors sought the relative safety of bonds. MSCI’s World Index of shares handed investors a 2.2 percent loss after accounting for reinvested dividends. Corporate bonds returned 8.1 percent globally this year, a separate Merrill Lynch index showed.

To contact the reporter on this story: Susanne Walker in New York at

To contact the editor responsible for this story: Dave Liedtka at

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