Treasuries Surge on Jobs-Growth Stall, Fed Stimulus Outlook

Treasury 30-year bond yields fell to the lowest since January 2009 after a government report showed no jobs were added in August, reinforcing concern the U.S. economy has slowed, which may prompt additional stimulus by the Federal Reserve.

U.S. 10-year yields fell below 2 percent as U.S. employment data yesterday gave the weakest reading since September 2010. Minutes of the Fed’s Aug. 9 meeting released Aug. 30 showed policy makers suggested the central bank could offer more support for the economy through focusing on purchases of longer-term securities. Ten-year notes gained for the fifth time in six weeks before the Fed releases its summary of regional economic conditions on Sept. 7.

“The employment numbers were just atrocious,” said Scott Graham, head of government bond trading in Chicago at Bank of Montreal’s BMO Capital Markets unit. “The expectation is the Fed is going to be buying the back-end, selling the front-end. You’ll absolutely see more curve-flattening trades.”

The 10-year note yield fell 20 basis points, or 0.2 percentage point, to 1.99 percent from 2.19 percent Aug. 26, according to Bloomberg Bond Trader prices. The price of the 2.125 percent security maturing in August 2021 rose 1 26/32, or $18.13 per $1,000 face amount, to 101 1/4.

The 10-year Treasury yield could reach 1.75 percent, Graham said.

Thirty-year bond yields fell 24 basis points to 3.30 percent and the two-year note yield was little changed at 0.20 percent.

Bond Returns

U.S. government bonds returned 2.8 percent in August, the most since the depths of the financial crisis in December 2008, according to a Bank of America Merrill Lynch index. Benchmark 10-year yields declined 57 basis points last month, the most since a 71 basis point drop in December 2008, touching a record low of 1.97 percent on Aug. 18.

Two-year notes traded at almost the record low 0.1568 percent after the Fed pledged Aug. 9 to keep the fed funds target in a zero to 0.25 range until at least mid-2013.

Bond investors have reduced their expectations for inflation as break-even rates on Treasury Inflation Protected Securities, or TIPS, are hovering near the lowest since October 2010. The break-even rate, calculated from yield differences on 10-year Treasury notes and inflation-indexed U.S. government bonds of similar maturity, has fallen to 2.04 percent from a high this year of 2.66 percent reached on April 11.

Lower Hurdle

“The U.S. economy is dead in the water,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo & Co. in Milwaukee. “The Treasury market is rallying. The hurdle was high for more accommodation, but it’s not as high anymore.”

The yield curve, the difference between two- and 30-year Treasury debt, narrowed to 310 basis points, the least in a year, as the jobless data bolstered the view that Fed Chairman Ben S. Bernanke will be inclined to take additional steps beyond the two previous rounds of debt buying, known as quantitative easing, or QE.

Pacific Investment Management Co.’s Bill Gross said he favors longer-maturity debt with the Fed likely to seek to narrow the difference between short-and long-term borrowing rates as employment growth stagnates.

Longer View

“We’ve advocated hard duration, that basically means something beyond five years,” Gross, manager of the world’s biggest bond fund, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “The front end of the curve, in the U.S. at least, is inert. You have to move out into longer duration, harder duration.’

U.S. payrolls were unchanged last month after an 85,000 gain in July that was less than initially estimated, Labor Department data showed yesterday in Washington. The median forecast in a Bloomberg News survey called for a rise of 68,000. The unemployment rate was unchanged at 9.1 percent.

The Office of Management and Budget said in an update of its economic forecasts through August that the jobless rate will average 9.1 percent in 2011 and 9 percent next year. President Barack Obama will address a joint session of Congress on Sept. 8 on his plans to boost jobs and accelerate growth.

“There isn’t much on the calendar that can materially affect the now-lowered economic outlook for the rest of 2011 and into 2012, which means rates should stay low within a range,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It certainly provides cover for the Fed if they want to do more on the accommodation front.”

Fed Minutes

Minutes from the Fed’s Aug. 9 meeting released this week showed some policy makers urged action to stimulate a sluggish economy. A few Fed policy makers, who weren’t identified, “felt that recent economic developments justified a more substantial move” beyond the pledge to hold its key interest rate at a record low at least until mid-2013, the minutes said.

Fed officials discussed a range of tools, including buying more government bonds to bolster the economy without coming to an agreement on what they might do next should the economy weaken further. They will more fully debate their options when they gather Sept. 20-21 for a two-day meeting that was originally scheduled to last one day.

“Bernanke is going to have to carry the world on his shoulders here, and everyone’s going to be looking for him and the Fed to begin to deploy QE3 now,’ said Richard Schlanger, a money manager at Pioneer Investments in Boston, which invests $20 billion in fixed-income securities. “These are definitely shaky times. That’s why Treasuries continue to rally.”

European sovereign-default risk rose to a record yesterday after the U.S. jobs data. The Markit iTraxx SovX Western Europe Index of credit-default swaps insuring the debt of 15 governments rose to 310 basis points in London, surpassing an all-time high closing price of 308 on Aug. 26.

Greece’s two-year notes extended their decline, pushing the yield on the securities up to a euro-era record 46.5 percent in London. Germany’s 10-year bond yield dropped to the lowest since at least 1999 when the euro was introduced, touching 1.996 percent.

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