SFC: Treasury Two-Year Yield Near Record Low Before U.S. Jobs Data
Aug. 5 (Bloomberg) -- Treasury two-year note yields were within seven basis points of a record low on speculation jobs reports will add to evidence that the U.S. economic recovery is too fragile for the Federal Reserve to raise interest rates.
The difference in yield, or spread, between two- and 10- year Treasury notes narrowed as investors reduced their inflation expectations. The possibility of deflation and a recession in the U.S. is 25 percent, according to Mohamed A. El- Erian, chief executive officer at Pacific Investment Management Co. The Fed\'s next policy decision is scheduled for Aug. 10.
\"Markets are once again more fearful about the economic outlook,\" said Glenn Marci, a fixed-income strategist in Frankfurt at DZ Bank AG, Germany\'s biggest cooperative lender. \"Investors are not confident enough to believe we\'ll see a sustained recovery and are looking more at the double dip scenario.\"
The two-year note yielded 0.58 percent as of 8:07 a.m. in London, after falling to a record low of 0.5143 percent on Aug. 3. The 0.625 percent note due July 2012 traded at 100 3/32, according to BGCantor Market Data. Ten-year yields were little changed at 2.96 percent.
That left the yield spread between the two securities at 2.37 percentage points, from 2.39 percentage points yesterday. It has narrowed from a record 2.94 percentage points on Feb. 18.
Bill Gross, who runs the record $239 billion Pimco Total Return Fund, increased holdings of government-related debt in June to the highest level in eight months, according to the company\'s website.
Job Losses
The U.S. lost 65,000 jobs last month, according to the median forecast in a Bloomberg News survey before the Labor Department reports the figure tomorrow. The unemployment rate climbed to 9.6 percent from 9.5 percent, the survey showed. A weekly report today may say initial claims for unemployment insurance were little changed at 455,000.
U.S. unemployment will stay unusually high, El-Erian, whose company runs the world\'s biggest mutual fund, said at a briefing for reporters today in Tokyo.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has narrowed to 1.82 percentage points from this year\'s high of 2.49 percentage points in January. Deflation is a general decline in prices.
Futures contracts on the CME Group Inc. exchange show a 40 percent chance policy makers will boost their target for overnight loans between banks at least a quarter-percentage point by August 2011, from 56 percent a week ago.
The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008 to foster the economic expansion. General Motors Co. and Ford Motor Co. reported this week U.S. sales that trailed analysts\' estimates.
\"As long as this monetary-policy environment continues, it\'s good for bonds,\" said Satoshi Okumoto, who helps oversee the equivalent of $65.6 billion in assets as a general manager at Fukoku Mutual Life Insurance Co. in Tokyo. \"Manufacturing jobs are still stagnating and that is crucial to the recovery of the economy.\" Fukoku bought Treasuries in July and August, Okumoto said.
Growth Slowing
U.S. economic growth slowed to 2.4 percent in the second quarter from 3.7 percent in the first. It will be 2.7 percent in the July-to-September period and 2.8 percent in the last three months of the year, a Bloomberg survey of economists shows.
Some investors say Treasury rates are too low.
\"Ten-year yields will rise eventually,\" said Kei Katayama, who helps oversee the equivalent of $51.3 billion in Tokyo as leader of the foreign fixed-income group at Daiwa SB Investments Ltd., part of Japan\'s second-largest brokerage. \"People want to take a little bit more risk.\"
Katayama said he\'s favoring investments in the Australian and Norwegian currencies over the U.S. dollar.
The U.S. 10-year yield will increase to 3.23 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.
Willingness to Lend
Yields indicate investors are becoming more willing to lend.
The TED spread, the difference between what banks and the U.S. pay to borrow for three months, narrowed to 28 basis points yesterday, the least since May. The three-month London interbank offered rate for dollars, known as Libor, fell for a 16th day yesterday to 0.424 percent.
U.S. government securities fluctuated between gains and losses this week. They dropped yesterday as service industries expanded in July at a faster rate.
The Treasury announced plans to sell a combined $74 billion of three- and 10-year notes and 30-year bonds next week, compared with $69 billion when the same combination of securities was offered in July.
Treasury Auctions
The Treasury will auction $34 billion in three-year notes on Aug. 10, $24 billion in 10-year debt the following day and $16 billion in 30-year bonds on Aug. 12.
Japanese investors bought a net 1.27 trillion yen ($14.7 billion) of overseas bonds and notes in the week ended July 30, according to the Ministry of Finance in Tokyo. Purchases have climbed for 12 weeks as bond yields in the nation fell.
Japan\'s 10-year bonds yield 1.03 percent, the least of 31 debt markets tracked by Bloomberg data. Ten-year Treasuries yield 1.92 percentage points more than their Japanese counterparts, down from this year\'s high of 2.61 percentage points in April.
