Treasuries Decline After Earlier Advance Before U.S. Payrolls

Treasuries fell, led by five-year notes, before a government report today that may show U.S. hiring rose last month amid mounting concern the global economic recovery may be faltering.

The declines sent five-year yields up from nine-month lows, with two-year yields rising from a yesterday’s record and benchmark 10-year debt paring the biggest weekly gain since the last time the Federal Reserve cut interest rates in 2008. Bonds surged from Japan to Australia to Germany this week as investors sought the relative safety of government debt as stock markets slid around the world. The gain in nonfarm payrolls probably wasn’t enough to lower unemployment, Bloomberg surveys showed.

“It’s really just a slight correction after a really big rally this week,” said Ralf Umlauf, head of floor research at Helaba Landesbank Hessen-Thueringen in Frankfurt. “Fears of a U.S. economic slowdown aren’t going to fade, even if we get a better-than-expected payrolls number, and that will keep Treasury yields at relatively low levels.”

Yields on five-year notes jumped five basis points to 1.14 percent as of 7:02 a.m. in New York, paring its drop this week to 21 basis points, according to Bloomberg Bond Trader prices. The 1.5 percent note maturing in July 2016 fell 9/32, or $2.81 per $1,000 face amount, to 101 23/32. The yield dropped earlier to 1.065 percent, the least since Nov. 5

The yield on the 10-year note rose one basis point to 2.42 percent, paring its decline this week to 39 basis points, while the two-year yield climbed two basis points to 0.28 percent, up from a record 0.2527 percent yesterday.

‘Hot Money’

Bonds are surging on concern a weakening U.S. economy and a worsening debt crisis in Europe will spur the Federal Reserve to provide additional monetary stimulus to bolster growth.

“Hot money is flowing into U.S. Treasuries in a flight to quality,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $37.9 billion and is a unit of Japan’s second-largest bank. “All bonds are benefiting.”

The 10-year Treasury yield will drop to 2.2 percent by year-end, Nakamura said. It fell past his prior forecast of 2.5 percent yesterday. Mizuho Asset bought Treasuries due in 10 years to 20 years this week, he said.

U.S. payrolls probably rose by 85,000 last month after an 18,000 gain in June, according to the median forecast of economists surveyed by Bloomberg News before today’s Labor Department report. The jobless rate may have stayed unchanged at 9.2 percent, a separate survey showed.

Global Slowdown

Treasuries have returned 3.67 percent in the past month as of yesterday, based on Bank of America Merrill Lynch data. An index of bonds around the world gained 2.04 percent in the period, Bank of America Merrill Lynch indexes show.

The MSCI All Country World Index of stocks has handed investors an 11 percent loss in the month. It dropped 4.08 percent yesterday, the most since 2009.

“The whole world is panicking,” Marc Faber, publisher of the Gloom, Boom & Doom report, said in an interview today on Bloomberg Television. Stocks are “extremely oversold,” he said, speaking from Zurich.

European Central Bank President Jean-Claude Trichet said yesterday the ECB resumed bond purchases and will offer banks more cash to stop a debt crisis in the region from engulfing Italy and Spain.

Japan’s 10-year bond yields slid as low as 0.988 percent today, the least this year, after the central bank yesterday expanded its asset-purchase fund.

‘Fear and Panic’

“Fear and panic are driving the markets,” said Shinji Nomura, chief debt strategist in Tokyo at SMBC Nikko Securities Inc., one of the 25 primary dealers obliged to bid at government debt sales. “I’m bearish on Japan’s bonds with 10-year yields below 1 percent.”

Australia’s 10-year rate fell as low as 4.42 percent today, a two-year low. The yield on same-maturity German bonds dropped to 2.23 percent, a level not seen since October.

Yields show investors are demanding greater compensation to lend to banks and companies, though the amounts have yet to approach the levels seen when credit markets froze in 2008.

The three-month London interbank offered rate for dollars rose to 0.272 percent, the most since May. The rate surged to 4.82 percent in October 2008.

The TED spread, the difference between what lenders and the U.S. government pay to borrow for three months, widened to 27.16 basis points, the most in a year.

Commercial Paper

The difference, or spread, between two-year swap rates and comparable-maturity Treasury yields was 26.25 basis points, versus the average for the past year of 20.45 basis points. It is down from this year’s highest close of 31 on June 24 and below the level of 52.25 in May 2010, when the extent of fiscal troubles in Greece came to light.

Rates on the highest-ranked 30-day commercial paper averaged 19 basis points, compared with 22 basis points at the start of 2011 and last year’s high of 44 in July, according to yields offered by companies and compiled by Bloomberg.

“Bonds are looking very overpriced but they’ve been the right place to be,” Geoff Lewis, the Hong Kong-based head of investment services at JPMorgan Asset Management, said in an interview today on Bloomberg Television.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE