Treasuries Rise as ECB Rate Cut Boosts Demand Before Jobs Report

Treasuries rose, pushing the yield on five-year notes to almost the lowest level since June, as U.S. debt lured buyers after the European Central Bank cut its benchmark interest rate to a record low.

Benchmark 10-year note yields dropped for a second straight day even as a report showed the economy grew at an annualized 2.8 percent rate in the third quarter, exceeding forecasts for a 2 percent gain. The ECB reduced the main refinancing rate by a quarter point to 0.25 percent after a drop in inflation to the slowest pace in four years. A report tomorrow is forecast to show U.S. employers added jobs at a slower pace last month amid speculation on the timing of a Federal Reserve tapering of its $85 billion of monthly bond-buying.

“Today’s move is indicative of what’s going on with central banks setting expectations,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the Fed, referring to the ECB cut. “If we’re going to be at zero to 0.25 percent for a while, we don’t have much room to back up in terms of higher yields. It will take a really strong employment number to increase the odds of a December tapering.”

Benchmark 10-year yields fell four basis points, or 0.04 percentage point, to 2.60 percent as of 4:59 p.m. New York time, based on Bloomberg Bond Trader data. The price of the 2.5 percent note due August 2023 added 3/8, or $3.75 per $1,000 face amount, to 99 5/32. The yield fell as much as five basis points, the most since Oct. 22.

Bond Rally

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose to $393.4 billion, the highest level this month, from $302 billion yesterday. It fell to a 2013 low of $147.8 billion on Aug. 9. The high was $662.3 billion on May 22.

Volatility in Treasuries as measured by the Merrill Lynch MOVE Index was at 66.5, lower than the 2013 average of 71.86.

Thirty-year bonds led today’s rally, with yields dropping six basis points to 3.71 percent. The Fed purchased $1.47 billion in Treasuries maturing between February 2036 and August 2043 today as part of its stimulus program.

“There is good relative value in Treasuries,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The ECB cut rates and we are at cheaper levels, which are all more bullish for Treasuries. Investors should buy dips in prices.”

Low Yields

The yield on the five-year note dropped three basis points to 1.31 percent after falling as low as 1.27 percent. It touched 1.25 percent on Oct. 30, the lowest level since June 19.

“ECB cuts with hints for more,” Bill Gross, co-founder and manager of the $247.9 billion Total Return fund at Newport Beach, California-based Pacific Investment Management Co., wrote in a note posted on Twitter. “Easy money everywhere now.”

Gross said he favors shorter-term Treasuries.

Treasuries were the cheapest relative to international counterparts in more than three years on speculation the Fed will curb its bond-buying program. U.S. government securities due in 10 years or more yield 1.06 percentage points more than non-U.S. sovereign debt, the most since 2010, Bank of America Merrill Lynch indexes show. As recently as September 2012, Treasuries yielded less than the rest of the world on average.

Relative Value

The yield on the German five-year security dropped as much as 12 basis points to 0.59 percent, the lowest level since Aug. 1. The difference between the yields on the German five-year note and the U.S. five-year Treasury yield was at 68 basis points, compared with the 2013 average of 48 basis points.

The yield curve measuring the difference between Treasury five-year and 10-year notes in the U.S. was at 1.29 percentage points. It earlier widened to 1.33 percentage points, the most since August 2011 on speculation the Fed’s target rate may be lower for longer as central bank officials wrote in two separate papers this week that the level of slack in the economy justifies an accommodative stance.

The Fed has kept its target rate unchanged at zero to 0.25 percent since December 2008.

The strategy of not raising rates if unemployment is above 6.5 percent has provided effective stimulus, and an even lower threshold could be helpful, wrote William English, head of the Division of Monetary Affairs. A paper by David Wilcox, the research and statistics chief, said slack in the economy argues for loose policy at a time of contained inflation expectations.

Price Measure

The Fed’s price indicator for the period from 2018 to 2023, known as the five-year five-year forward break-even rate was at 2.56 percent as of Nov. 4, below the 2013 average of 2.66 percent, suggesting inflation remains tamed.

The Fed papers were posted on the International Monetary Fund’s website before a conference today in Washington. Senior staff members at the Fed write the briefing materials for Federal Open Market Committee meetings and draft the central bank’s policy options.

A report tomorrow is forecast to show employers added 120,000 jobs in October, economists predicted in a Bloomberg News Survey before the Labor Department data. Employment increased 148,000 in September.

“If tomorrow’s number is a little bit out of consensus, it will be a game changer,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors.

Jobs Data

A report today showed fewer Americans filed applications for unemployment benefits last week, indicating firings haven’t picked up following the partial government shutdown.

The ECB has just one more quarter-point cut left before reaching zero, increasing the likelihood of unconventional tools such as quantitative easing or a negative deposit rate if prices slow further or the economic recovery stalls. Euro-area inflation is less than half the ECB’s target and unemployment is at the highest level since the currency bloc was formed in 1999.

“It creates a situation where people think we’re running into some sort of deflationary problem and maybe rates will be lower for longer,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Most people were not expecting them to do it, so it’s a little bit of a surprise.”

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