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U.S. 2-, 5-Year Yields Fall to Record Lows on Fed-Buy Outlook

Treasury two- and five-year note yields slid to record lows as data showing U.S. employers cut more jobs than forecast last month spurred speculation the Federal Reserve will buy more bonds to stimulate the economy.

Ten-year note yields fell to the lowest level since January 2009 as investors bet the floundering labor market signals weaker-than-expected growth in the broader economy. Yields have slid this week as investors speculated the Fed will purchase more assets, a strategy called quantitative easing. Bank of America Corp. said very “strong data” would be needed to stop the central bank from launching a purchase program in November.

“In the eyes of the market, the employment report strengthened the case for additional asset purchases,” said Richard Bryant, senior vice president in fixed income at MF Global Inc. in New York, a broker of exchange-traded futures. “It didn’t show the type of improvement that would be needed to dissuade the Fed from further QE.”

The two-year note yield slipped 1 basis point, or 0.01 percentage point, to 0.347 percent at 4:59 p.m. in New York, according to BGCantor Market Data. The yield touched 0.3351 percent, the least ever, marking the sixth straight day it has set or matched a record low. The 0.375 percent security due in September 2012 traded at 100 2/32.

The five-year note yield fell 2 basis points to 1.1 percent and dropped as low as 1.0686 percent, setting a record for the fifth consecutive day. The yield on the 10-year note rose 1 basis point to 2.39 percent after touching 2.3302 percent, the lowest level since Jan. 20, 2009. Treasury notes gained for a fourth straight week, with the 10-year yield falling 12 basis points and the 2-year yield decreasing 7 basis points.

The 30-year bond yield rose 3 basis points to 3.75 percent.

Treasury Auctions

Thirty-year bonds and 10-year notes erased advances today as the Treasury prepared to sell $66 billion in 30-, 10- and 3-year securities next week at auctions that begin Oct. 12.

“The market has refocused its attention to the next order of business -- supply,” MF Global’s Bryant said.

The Fed will likely announce an initial buying program of $500 billion over the next six months, but promise additional buying power “if necessary,” Ethan Harris, head of developed- markets economic research in New York at Bank of America Merrill Lynch Global Research, one of 18 primary dealers that trade with the Fed, wrote in a note to clients. Harris expects the yield on the 10-year note to fall to 2 percent by year-end.

No ‘Fixed Endpoint’

Barclays Plc, another primary dealer, said in a note to clients today it expects the central bank to start a buying program in November, “with an announcement on the flow of Treasury purchases, such as $100 billion per month, without a fixed endpoint.”

The firm revised its year-end forecast for the 2-year yield to 0.3 percent, from 0.7 percent, and lowered its prediction for the 10-year yield to 2.4 percent, from 3 percent, according to figures it released today.

Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said the Fed will likely buy $100 billion in government securities a month to keep borrowing costs down. The central bank may purchase $1.2 trillion in Treasuries, he said. Policy makers next meet Nov. 2-3.

The difference between the yields on 10-year notes and 30-year bonds reached 1.37 percentage points, the highest level since Bloomberg began keeping the data in 1992, as investors speculated the Fed would focus its purchases on shorter-term Treasury securities.

Outside ‘Buy Zone’

“The 30-year seems to be outside of the Fed’s buy zone for quantitative easing,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “It’s one of the few parts of the U.S. Treasury market that you can sell on a short-term basis if you want to reduce exposure to bonds and increase it in other sectors.”

Employers eliminated 95,000 jobs after a revised decrease of 57,000 in August, Labor Department figures in Washington showed today. The median estimate of economists surveyed by Bloomberg News called for a 5,000-position drop. The unemployment rate unexpectedly held at 9.6 percent.

Private payrolls that exclude government agencies increased 64,000, less than forecast.

The gap in yields between 30-year bonds and similar maturity inflation-indexed debt widened to 2.34 percentage points, the most since June 28, as speculation increased that the central bank will resume buying Treasuries. The spread is an indication of inflation expectations over the life of the securities. It was at a 15-month low of 1.84 percentage points on Aug. 25.

Treasury 10-year notes fell earlier after a policy maker cast doubt on the likelihood the central bank will boost bond purchases. Fed Bank of St. Louis President James Bullard said the economy hasn’t slowed enough to make the need for quantitative easing obvious.

Download: Fed's Fisher Speaks About U.S. Economy

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