Yields on Treasury 10-year notes fell the most in a month as lower-than-forecast U.S. employment growth raised speculation the Federal Reserve will embark on a third round of asset purchases to sustain the economic expansion.
The yield approached the record low set June 1 as the rally in the benchmark security continued for a second consecutive week. Traders speculated that the $66 billion of U.S. notes and bonds slated to be sold next week will retain their haven appeal after European Central Bank President Mario Draghi said the currency bloc still faces risks even with policy makers cutting interest rates to a record low on July 5.
“The Fed needs to do more,” said Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York. “There is going to be a bid for Treasuries, for growth issues or European issues.”
The benchmark 10-year note yield decreased 10 basis points, or 0.10 percentage point, to 1.55 percent yesterday in New York, from 1.65 percent a week earlier, according to Bloomberg Bond Trader data. The 1.75 percent security due in May 2022 rose 28/32, or $8.75 per $1,000 face amount, to 101 26/32.
The record low 10-year yield of 1.44 percent was set June 1 after payrolls climbed less than the most-pessimistic forecast in a Bloomberg News survey. Yields tumbled 29 basis points that week on the jobs report and concern Greece would exit the European Monetary Union.
U.S. payrolls rose 80,000 last month after a 77,000 increase in May, Labor Department figures showed yesterday in Washington. Economists projected a 100,000 gain, according to the median estimate in a Bloomberg News survey. The jobless rate held at 8.2 percent.
“The unemployment number shows listlessness in the U.S. economy,” said Tony Crescenzi, a strategist at Newport Beach, California-based Pacific Investment Management Co., the world’s biggest manager of bond funds, in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “It’s clearly growing too slowly to keep the unemployment rate from rising and with continued figures like this, one would expect the Federal Reserve to continue to be what it’s been, which is activist.”
Implied yields on Eurodollar futures contracts, which are based off expectations for the three-month dollar London interbank offered rate, or Libor, and changes in central bank monetary policy, fell between one and three basis points for contracts that expire through the end of 2015. The implied yield on the December 2014 contract dropped to 0.745 percent.
Eurodollar trade in price terms while the implied yield is derived by subtracting the contract price from 100.
The Fed lowered its benchmark interest rate to zero in December 2008 and has said economic conditions will probably warrant holding the rate low through at least late 2014.
“There’s an increasing likelihood of QE3 sometime between now and the September Fed meeting,” said William O’Donnell, head U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 21 primary dealers that trade with the central bank. “The debate will be do they act in August or do they wait until the September meeting.”
Speculation of more Fed action began earlier in the week after the Institute for Supply Management’s index of U.S. non-manufacturing businesses, which covers about 90 percent of the economy, fell to 52.1 in June from the prior month’s 53.7. Readings of above 50 signal expansion.
The Fed said June 20 that it would enlarge its program of replacing shorter-term securities from its Treasury holdings with longer-term securities to $667 billion from $400 billion. The central bank has purchased in two rounds of quantitative easing $2.3 trillion of government and mortgage securities to help lower private sector and government borrowing costs.
The Treasury will auction $32 billion of three-year notes on July 10, $21 billion of 10-year securities on July 11 and $13 billion of 30-year bonds the next day.
The ECB and People’s Bank of China both cut interest rates July 5 and the Bank of England increased its asset-purchase program. Draghi said July 5 that “economic growth in the euro area continues to remain weak with heightened uncertainty weighing on both confidence and sentiment.”
“The problems in Europe are probably going to remain a drag on the U.S.,” said Adam Brown, director of Treasury trading at Barclays Plc in New York, another primary dealers. “If you think QE is going to happen, generally you’re going to be bullish on rates.”