Treasury 10-year note yields fell to a three-month low after a report showed payrolls climbed less than projected in September, indicating the U.S. economy had little momentum leading up to the federal government shutdown.
European, Canadian and emerging-markets debt also rallied as the payrolls report added to speculation that the Federal Reserve will maintain its U.S. bond-buying program into next year, which has helped to keep borrowing costs low worldwide. The Treasury’s auction of $35 billion of one-month bills attracted demand at close to the pre-government shutdown average seen for the securities this year as investor concern that the U.S. may default ebbed. A measure of volatility in Treasuries dropped to the lowest level since May.
“Yields aren’t headed higher, certainly, in the face of this report,” said Bill Gross, the co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co., in an interview on Bloomberg Radio with Tom Keene. “We will grudgingly go lower from this point. We probably won’t be tapering anytime soon.”
The benchmark U.S. 10-year yield fell nine basis points, or 0.09 percentage point, to 2.51 percent at 5 p.m. New York time, Bloomberg Bond Trader data showed, the lowest since July 24. The price of the 2.5 percent note due in August 2023 rose 3/4, or $7.50 per $1,000 face amount, to 99 28/32.
The yield touched 3.005 percent on Sept. 6, breaching 3 percent for the first time since July 2011, and up from a 2013 low of 1.61 percent on May 1. Its 10-year average is 3.56 percent.
“The 10-year, at 2.50 percent, belongs where it is at the moment,” Gross said.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped to 63, the lowest level since May. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 on May 9.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 61 percent to $338.5 billion, from $211 billion yesterday. The average this year is $315.5 billion.
Germany’s 10-year bund yield fell five basis points to 1.80 percent after reaching 1.79 percent, the lowest since Oct. 9. The 10-year gilt yield fell 10 basis points to 2.64 percent after touching 2.63 percent, the lowest level since Aug. 27. Italy’s 10-year yield fell nine basis points to 4.10 percent, the lowest level since June 5.
Canada’s benchmark 10-year government yield dropped seven basis points to 2.48 percent and reached 2.47 percent, the lowest level since Aug. 12. Yields on peso bonds due in December 2024 fell 10 basis points to 5.68 percent.
The seven-day relative strength index for the Treasury 10-year note yield was at 34.7 today, down from 39 yesterday, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.
“This number was clearly a disappointment,” said Paul Montaquila, fixed-income investment officer with BNP Paribas SA’s Bank of the West, referring to the jobs report. “We’re not going to get anything over the next two to three months that will get the 10-year yield over 3 percent. We will continue to see bond purchases well into 2014.”
The proportion of net longs among Treasuries investors climbed to 8 percentage points in the week ending yesterday, up from 6 percentage points in the week ending Oct. 15, according to a survey by JPMorgan Chase & Co.
The percent of outright longs, or bets the securities will increase in value, rose to 23 percent, from 21 percent, according to the survey. The percent of outright shorts was unchanged at 15 percent. Investors cut neutral bets to 62 percent, from 64 percent.
“We’re going to test the downside now, move closer to the 2.5 threshold on 10-year yields,” said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. “Any tapering’s been pushed back to December at the earliest. They’d like to see firmer nonfarm payrolls.”
The $35 billion of four-week bills sold today drew a rate of 0.03 percent, down from 0.35 percent on Oct. 8, which was the highest since October 2008.
The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 4.31, compared with 4.33 at the last auction, and up from 2.75 on Oct. 8. The average was 4.18 at the 10 auctions before the Oct. 1 shutdown.
Payrolls grew by 148,000 in September versus the median forecast for a 180,000 advance by 93 economists in a Bloomberg News survey. The gain followed a revised 193,000 rise in August that was larger than initially estimated, Labor Department figures showed today in Washington. Unemployment fell to 7.2 percent, the lowest level since November 2008.
The reports, delayed by the 16-day shutdown that ended Oct. 17, were originally slated for Oct. 4.
“These were much weaker payrolls than expected -- there’s really no bright spot in the data you can point to,” said Ira Jersey, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG. “This makes their decision not to taper look insightful, given the weakness in the numbers. We will have to wait till the November data comes out in December to get a clear picture of what’s going on in the economy.”
Jersey said “we could probably go down to 2.47 percent on the 10-year.”
Foreign investors were net sellers of U.S. long-term portfolio assets in August, with the net long-term portfolio investment outflow at $8.9 billion after a revised $31 billion inflow in July, the Treasury Department said in a statement in Washington.
China remained the biggest foreign owner of U.S. Treasuries in August even as its holdings dropped for the second time in three months, by $11.2 billion to $1.27 trillion. Japan, the second-largest holder, increased its share by $13.7 billion to $1.15 trillion, the figures showed.
The Treasury data cover a period before the Fed opted against reducing its monthly bond buying at its Sept. 17-18 meeting.
Economists predict the Fed will maintain its $85 billion of monthly bond buying until March, according to a Bloomberg survey conducted Oct. 17-18. They forecast the government closure cut growth by 0.3 percentage point this quarter.
Before the shutdown, most policy makers said the central bank would probably reduce bond purchases this year. The Fed’s next two policy meetings are Oct. 29-30 and Dec. 17-18.
Traders are pricing in a 29.1 percent probability that the Fed will raise its benchmark overnight rate by its January 2015 meeting, down from a 70.7 percent likelihood on Sept. 5, the day before the August payroll data was released.
Standard & Poor’s estimates the shutdown, which ended Oct. 17, shaved at least 0.6 percent from fourth-quarter 2013 gross-domestic-product growth, taking $24 billion out of the economy.
The Fed purchased $1.56 billion of Treasuries maturing between February 2036 and February 2043 today as part of the program.