Bonds retrace some part of the massive rally this week By Deborah Levine, MarketWatch NEW YORK (MarketWatch) — Treasury prices extended declines Friday, cutting into some of the week’s massive rally, after the U.S. said the economy added more jobs in July than analysts had expected. Benchmark 10-year yields are still down by the most this week since August 2009. “Today’s number reaffirms that maybe we’re not falling into another recessionary environment in the near term,” said Roger Bayston, senior vice president of Franklin Templeton’s fixed income group. “Uncertainty is still going to be there because the big-picture things are not going away, but today’s number provides a little bit of relief.” Yields on 10-year notes 10_YEAR +2.46% , which move inversely to prices, rose 9 basis points to 2.48%, from 2.46% prior to payrolls and after touching 2.34% in Asian trading – its lowest level since October. Yields are down from 2.80% a week ago. Yields on 2-year notes 2_YEAR +11.88% rose 3 basis points to 0.30%, coming off an all-time low. Thirty-year bond yields 30_YEAR +1.94% also rose, by 8 basis points to 3.75%. The U.S. added 117,000 jobs outside the farm sector in July and the unemployment rate fell slightly to 9.1%, the Labor Department said. See story on payrolls report. The numbers diffused some fears that the U.S. may be heading back into a recession, which has sent global markets reeling this week. See more on Treasury rally. “Pessimism has been overdone and in this regard one must see this report as a good one, especially given the massive rally in rates over the past week,” said Eric Green, chief market economist at TD Securities. “It is not the end of the world; the economy is not slipping into recession, but the labor market is far from healthy.” For the week, 30-year yields are also down the most since December 2008 and at the lowest levels since last October. Two-year yields touched a record low and are down from 0.36% a week ago. Can the Fed help? A string of weak economic data and falling federal spending to reduce its deficit have analysts starting to reconsider what, if anything, the Federal Reserve can do to boost growth without risking higher inflation. U.S. monetary-policy makers meet on Tuesday. One option is shifting its portfolio maturity, to keep long-term rates low, by letting shorter-dated securities mature and replacing them with longer-dated ones. That would be a variation on something the Fed did almost 50 years ago called Operation Twist. Read more on Fed’s Operation Twist option. Expectations of such a step may be behind the massive gains in long-term bonds, which pushed the yields down that much. The shift in yields and “suggest the market has done Operation Twist ahead of the Fed,” strategists at CRT Capital said. “There’s not much left.” They also note that expectations for an actual third round of quantitative easing are low. In a highly unscientific survey they conduct before each payrolls report, respondents saw a 36% change of seeing a QE3.

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