BLBG: Treasuries Rally for a Fourth Week on Prospects for Debt Purchases by Fed
Treasury notes rallied for a fourth week as data showing U.S. employers cut more jobs than forecast last month increased speculation the Federal Reserve will start a new program of buying bonds to stimulate the economy.
Yields on two- and five-year notes reached record lows yesterday after the government said employers cut 95,000 jobs, fueling concern the economic recovery is stalling. Fed Chairman Ben S. Bernanke said Oct. 4 that quantitative easing, a strategy in which the Fed purchases assets, would probably spur growth. Inflation slowed last month, a report next week may show.
“The economy is still recovering, but it’s slowing down,” said Ray Remy, head of fixed income in New York at Daiwa Securities America Inc., one of 18 primary dealers that trade with the Fed. “The market is anticipating a new round of QE. We could go lower in yields.”
The two-year note yield fell 7 basis points, or 0.07 percentage point, to 0.343 percent, from 0.41 percent on Oct. 1, according to BGCantor Market Data. It touched 0.3351 percent yesterday, the least ever, marking the sixth straight day it set or matched a record low. The five-year note yield touched 1.0686 percent yesterday, reaching a record low level for the fifth consecutive day.
The yield on the 10-year note dropped 12 basis points to 2.4 percent, from 2.51 percent on Oct. 1. It reached 2.3302 percent yesterday, the lowest level since Jan. 20, 2009. The 2.625 percent security due in August 2020 gained 1, or $10 per $1,000 face amount, to 102.
Bond Auctions
Thirty-year bonds fell, pushing yields up 3 basis points to 3.75 percent, as investors speculated the Fed will buy shorter- term securities and the government said it will auction $13 billion of so-called long bonds next week.
The U.S. will sell $66 billion in notes and bonds next week: $32 billion in 3-year notes on Oct. 12, $21 billion in 10- year securities the next day and $13 billion in 30-year bonds on Oct. 14, the Treasury Department said.
Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said the payrolls data was a “strong signal” for a new round of asset purchases by the Fed.
Employers eliminated 95,000 jobs after a revised decrease of 57,000 in August, Labor Department figures in Washington showed. The median estimate in a Bloomberg News survey was for a 5,000-position drop. Private payrolls that exclude government agencies increased 64,000, less than forecast. The unemployment rate unexpectedly held steady at 9.6 percent.
‘Harbinger’ of Restraint
“A lot of government jobs were lost at the state and local level, which may be a harbinger of fiscal restraint,” David Ader, head of government bond strategy at Stamford, Connecticut- based CRT Capital Group LLC, wrote in a note to clients. The next big move in Treasuries will come upon confirmation of quantitative-easing plans, he wrote.
St. Louis Fed President James Bullard said in a CNBC interview yesterday the economy may not have slowed enough to make a strong case for quantitative easing.
The central bank completed a program in March in which it acquired $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt to spur economic recovery. The Fed was the biggest buyer of Treasuries when it purchased $300 billion of them in 2009.
Goldman Sachs Group Inc., another primary dealer, said it expects the Fed to announce renewed asset purchases at its two- day policy meeting that starts on Nov. 2.
‘At Least $1 Trillion’
“QE-1 eased financial conditions significantly -- suggesting that QE-2 could also have sizable effects on asset prices,” economists led by Jan Hatzius, New York-based chief U.S. economist at the firm, wrote in a note to clients yesterday. “We regard an initial announcement of $500 billion as likely but anticipate that the size of the purchase program will ultimately total at least $1 trillion.”
Gross expects the Fed to buy about $100 billion per month, or $1.2 trillion a year, he said yesterday in a radio interview on “Bloomberg Surveillance” with Tom Keene.
Barclays Plc, a primary dealer, said in a note it expects the central bank to begin a buying program in November, “with an announcement on the flow of Treasury purchases, such as $100 billion per month, without a fixed endpoint.”
The gap in yields between 30-year bonds and comparable inflation-indexed debt, an indication of inflation expectations, rose to 2.32 percentage points as speculation increased the Fed will resume bond buys. It was the highest since June 29 and compared with a 15-month low of 1.84 percentage points Aug. 25.
“The 30-year is reflecting the impact of inflationary policies from QE 2,” Gross said.
The rise in consumer prices slowed to 0.2 percent in September, from 0.3 percent in August, according to economists in a Bloomberg survey before the Labor Department reports the data Oct. 15. Retail sales rose 0.4 percent, matching the increase in August, according to a survey before the Commerce Department data, also due Oct. 15.
Treasuries have returned investors 9.3 percent in 2010, according to a Merrill Lynch index, compared with a 2.2 percent loss for the same period in 2009.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
