Treasury 10-Year Yield Falls to 3-Month Low on Jobs Datas

Treasuries rose, pushing 10-year yields to a three-month low, as employers in the U.S. added fewer jobs than forecast amid speculation the Federal Reserve may consider additional stimulus measures to boost the economy.

Government debt is poised for a seventh consecutive weekly gain, the longest stretch since 2008 at the height of the financial crisis, as payrolls grew the least jobs in six months to fuel concern the U.S. economic recovery is faltering. Yields fell before elections in Europe that may result in leadership changes and inflame the region’s sovereign-debt crisis. The U.S. will sell $72 billion in notes and bonds next week.

“There is not enough to hang your hat on for quantitative easing to be guaranteed, but the economy is weaker,” said Scott Graham, head of government-bond trading in Chicago at Bank of Montreal’s BMO Capital Markets unit, one of 21 primary dealers that trade with the Fed. “Europe is still a mess, which is keeping us at these low yield levels.”

The benchmark 10-year note yield fell five basis points, or 0.05 percentage point, to 1.88 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.87 percent, the lowest since Feb. 3. The 2 percent security due in February 2022 gained 15/32, or $4.69 per $1,000 face amount, to 101 2/32.

The weekly drop in yield matches the longest run since the seven weeks ended Dec. 19, 2008.

The 10-year yield will “rest” below 2 percent for the next 45 days, Bill Gross, who runs the world’s biggest mutual fund at Newport Beach, California-based Pacific Investment Management Co., said in an interview today with Ken Prewitt and Tom Keene on Bloomberg Radio’s “Bloomberg Surveillance.”

Net Shorts Drop

Hedge-fund managers and other large speculators decreased their net-short positions in 10-year note futures in the week ending May 1, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 144,756 contracts on the Chicago Board of Trade. Net-short positions fell by 12,334 contracts, or 8 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

U.S. employers added 115,000 jobs in April after a revised increase of 154,000 positions in the previous month, the Labor Department reported today in Washington. The median forecast of 85 economists in a Bloomberg News survey was for an increase of 160,000. The unemployment rate fell to 8.1 percent.

‘No Wage Growth’

Average hourly earnings for the 12 months ended April rose 1.8 percent, the Labor Department said. The measure has averaged 1.9 percent for the previous two years, compared with a 2.9 percent average for three years ended April 2010.

Bond traders have priced in an average rate of inflation of 2.2 percent for the next 10 years, as measured by the difference between 10-year yields on Treasury Inflation-Protected Securities and regular U.S. government securities, a difference known as the break-even inflation rate. The median forecast shown by the spread is 2.3 percent during the past 10 years.

The gap between Treasury yields for two- and 10-year securities has narrowed to 1.62 percentage points, the smallest in seven months, from 2.09 percentage points on Oct. 27, as investors have become increasingly skeptical about the economy’s ability to sustain growth without Fed support.

“Inflation concern is moot at this point,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “There is absolutely no wage growth. How do you get inflation if people can’t pay for higher prices? You don’t.”

Safety Premium

Valuation measures show investors are paying a premium to own the safety of U.S. government securities. The so-called term premium model created by economists at the Fed was negative 0.72 percent today, down from negative 0.26 percent on March 29 and near the record low of 0.79 percent reached Feb. 2. The average is positive 0.53 percent for the past decade. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasuries of all maturities have returned 2.3 percent including reinvested interest between March 20, when the 10-year note yield reached its high for the year of 2.4 percent, and yesterday, according to Bank of America Merrill Lynch indexes. The Standard & Poor’s 500 Stock Index fell by 1 percent during the same period.

Volatility as measured by the Bank of America Merrill Lynch MOVE index fell to 62.90 on April 30, the lowest since June 2007, indicating the market isn’t betting on a significant rise in yields in the near term.

‘Risk Assets’

While the Fed refrained at a two-day meeting last week from new actions to boost the economy, Chairman Ben S. Bernanke said it’s “prepared to do more” if necessary. The Fed bought $2.3 trillion of bonds in two rounds of quantitative easing, or QE, from December 2008 to June 2011 to lower borrowing costs.

Demand for Treasuries was boosted as investors sold stocks and the S&P 500 fell as much as 1.7 percent today.

“Risk assets were disappointed that the data wasn’t good enough to show strong growth, but also not bad enough to get the Fed to come with another round of stimulus,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, a primary dealer. “That then pushes investors into one of the few safe assets out there on a relative basis, which is Treasuries.”

The U.S. will issue $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in 30-year bonds on three consecutive days beginning May 8, the same amounts sold in each so-called refunding month since November 2010. The Treasury delayed decisions on whether to sell floating-rate securities and bills with negative yields at government auctions for the first time.

Service Industries

The jobs data came a day after the Institute for Supply Management’s index of U.S. service industries, which account for almost 90 percent of the U.S. economy, decreased to 53.5 in April from 56 a month earlier. The Tempe, Arizona-based group’s measure was projected to decline to 55.3, according to a Bloomberg survey. Readings above 50 signal expansion.

Joblessness in the 17-nation euro area increased to 10.9 percent in March, the highest since April 1997, from 10.8 percent a month earlier, data showed this week.

Euro-region services and manufacturing output contracted more than initially estimated in April, a composite measure showed today, adding to signs of a deepening economic slump.

“We still have elections in Europe this weekend,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “The market can’t move a lot.”

France, Greece

Francois Hollande, the Socialist challenger for the French presidency who is leading incumbent Nicolas Sarkozy in opinion polls, has criticized Europe’s German-led austerity push and argued for the renegotiation of the region’s fiscal compact. Greece, which completed the largest debt restructuring in history this year, also holds an election on May 6.

The vote in Greece may amplify the mutiny against the wage and spending cuts and tax increases that are conditions for drawing on financial aid and staying in the currency.

The Treasury rally is becoming “overdone” on a short-term basis, and 10-year note yields may be poised to rise, according to FTN Financial, citing technical analysis.

The drop below 1.9 percent means investors should sell today, looking to buy back the benchmark Treasuries over the next 10 days as yields reach more attractive levels, Jim Vogel, head of agency-debt research at FTN in Memphis, Tennessee, wrote in a client note. The securities should be trading in a range of 2.04 percent to 1.9 percent, he said. A move below 1.855 percent will signal the rallying trend will continue, he said.

The Federal Reserve sold $8.64 billion of Treasuries due from August 2012 to February 2013 today as part of its program to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

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