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Treasuries Rise a Second Quarter Amid Growth Pessimism

Treasuries rose for the second straight quarter, bolstered by their longest rally since 2008, as concern global growth is slowing and Europe’s debt crisis is worsening stoked demand for the haven of U.S. government debt.

Gains were tempered, with 10-year yields rising from a record low, as added stimulus from the European Central Bank and the Federal Reserve encouraged risk appetite. Stocks surged before falling for the past two weeks as U.S. data showed a weak economy and American and European leaders struggled over ways to pay their nations’ debt. A report next week may show the U.S. added less than half as many jobs in September as in January.

“The economy is drifting into a deeper and deeper malaise, and that has supported the Treasury market,” said Christopher Sullivan, who oversees $2 billion as chief investment officer at United Nations Federal Credit Union in New York. “We’ve had a whole lot of monetary expansion, but countering that has been political inactivity globally along with no sign of inflation.”

Treasuries returned 0.6 percent this quarter, according to the Bank of America Merrill Lynch Treasury Master index. They gained 3 percent from April through June after losing 1.3 percent in the first quarter. The Standard & Poor’s 500 Index rose 6.4 percent this quarter, including reinvested dividends. It declined 2.8 percent from April through June.

Ten-year notes yielded 1.63 percent yesterday in New York, according to Bloomberg Bond Trader prices, from 1.65 at the end of June. They reached a record low 1.379 percent on July 25 before climbing to a four-month high of 1.89 percent on Sept. 14, the day after the Fed announced its latest stimulus effort, and then declining.

Below Inflation

The benchmark yield is seven basis points, or 0.07 percentage point, below the 1.7 percent annual rate of inflation after dropping below that level on Sept. 25 for the first time in two weeks.

Thirty-year bond yields rose seven basis points to 2.82 percent this quarter. They touched 2.4405 percent on July 26, the lowest on record, and increased to as high as 3.12 percent, also the most since May, on Sept. 19.

“Treasuries will continue to be supported in an ongoing risk environment,” Padhraic Garvey, head of developed market debt at ING Bank NV in Amsterdam, said yesterday. “Growth remains weak, and the Fed is likely to continue with its easy monetary policy. Treasuries are also reactive to the problem in Europe. Yields will stay low.”

Jobs Market

Underpinning demand for Treasuries in the U.S. have been a stagnant labor market and slowing economic growth. The unemployment rate has been stuck above 8 percent for 43 straight months and employers added 96,000 jobs in August, versus 275,000 in January, Labor Department data showed on Sept. 7. Payrolls increased by 115,000 in September, a Bloomberg News survey forecast before the department issues the report Oct. 5.

Gross domestic product growth slowed to an annual 1.3 percent in the second quarter, the Commerce Department said Sept. 27, from 4.1 percent from October through December 2011.

Fed Chairman Ben S. Bernanke, speaking Aug. 31 at a conference in Jackson Hole, Wyoming, called the jobs picture “a grave concern.” He also said the nation’s “fiscal cliff” clouds the economic outlook. He was referring to tax increases and automatic spending cuts of $1.2 trillion over a decade set to begin if Congress fails to agree by Dec. 31 on ways to reduce the budget deficit.

Quantitative Easing

The U.S. central bank announced Sept. 13 it would buy $40 billion of mortgage debt a month in a third round of quantitative easing to boost growth and lower unemployment. It said it would continue the purchases until the recovery is well-established, and keep its benchmark interest rate at virtually zero into 2015.

Stocks surged, with the S&P 500 closing the next day at the highest level since 2007. It has fallen 1.7 percent since then.

Yields on U.S. government securities climbed to four-month highs on speculation inflation would increase and concern the Fed wasn’t buying more Treasuries. They recovered their losses, with 10-year yields falling last week below their 1.76 percent closing level the day before the Fed announcement.

The five-year, five-year forward break-even rate, a measure the Fed uses to help guide monetary policy, was 2.68 percent on Sept. 26, down from a 13-month high of 2.88 percent on Sept. 14. The 10-year average is 2.75 percent.

“As bad as things have been here, they are much worse in Europe,” Michael Cloherty, head of U.S. interest-rate strategy at Royal Bank of Canada’s RBC Capital Markets in New York, one of 21 primary dealers that with the Fed, said Sept. 24. He spoke in an interview on Bloomberg Radio with Tom Keene and Ken Prewitt. “While yields here are still very low, there’s still this safety bid around the world.”

ECB Plan

The euro area economy may shrink by 0.5 percent this year, compared with an average of 1.27 percent growth in the Group of 10 developed nations, surveys of economists by Bloomberg show.

Treasuries declined Sept. 6 as investors sought higher-yielding assets as the ECB announced a program to buy euro-area government bonds to contain the bloc’s debt crisis, now in its third year. Bank President Mario Draghi announced the unlimited-purchase plan to regain control of interest rates in the region.

Bonds dropped Sept. 27 for the first time in nine days, snapping their longest rally since December 2008, amid optimism Spain was moving closer to meeting budget-deficit targets.

Spanish Prime Minister Mariano Rajoy’s cabinet approved a tax on lottery winnings and a cut in ministries’ spending to shrink the euro area’s third-biggest budget deficit.

Demonstrators in Spain and Greece protesting budget cuts clashed with police this week.

Net Longs

Hedge-fund managers and other large speculators trimmed their net-long position in 10-year note futures in the week ended Sept. 25, according to U.S. Commodity Futures Trading Commission data.

Speculative long positions, or bets prices will rise, outnumbered short positions by 83,526 contracts on the Chicago Board of Trade. Net-long positions fell by 38,910 contracts, or 32 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report. They reached 122,436 a week earlier, the most since March 2008.

Ten-year yields will fall to a record 1.35 percent by Dec. 31, Carl Lantz, head of interest-rate strategy at the primary dealer Credit Suisse Group AG, wrote in a report Sept. 27.

The Fed may begin next year with a monthly buying pace of $100 billion in securities, made up of $60 billion of Treasuries and $40 billion of mortgage bonds, Lantz wrote. It may also drop its offsetting sales of shorter-maturity debt, he said.

“Yields can, and will, fall,” Lantz wrote.

A Bloomberg survey of economists with the most recent projections given the heaviest weightings predicts the 10-year note yield will reach 1.78 percent by Dec. 31.

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