Jobs report pushes yields to record lows; 10-year yield hits 2.36 percent, a low for the year

Wednesday, October 6, 2010

Treasury yields sink to new lows; Eyes on the Fed

NEW YORK — Any doubt that the Federal Reserve will launch a new effort to stimulate the economy seemed to evaporate Wednesday as Treasury rates plummeted to record lows.

The Fed has kept short-term interest rates near zero since 2008. In recent weeks, traders have started speculating that the central bank would take aim at long-term interest rates by buying more Treasurys. Now, “there’s not only a high probability, it’s a virtual lock,” said Bill O’Donnell, head of U.S. government bond strategy at the Royal Bank of Scotland.

An unexpectedly bad employment report helped sink Treasury yields Wednesday. In its monthly report, the payroll company ADP said private employers shed 39,000 jobs in September. The news caught the bond market by surprise: Private economists had expected employers to add 20,000 jobs.

Traders bid up Treasury prices, causing bond yields to fall. The two-year Treasury yield slipped to 0.39 percent, and the five-year yield sank to 1.13 percent. Both are the lowest yields on record, traders say. The yield on the 10-year note hit its lowest point this year: 2.36 percent, a sharp drop from 2.50 percent a week ago.

The payroll report was just an extra shove in pushing yields over the ledge, bond market participants said. Other events this week bolstered their conviction that the Fed will expand its purchases of Treasury debt to push rates lower, in what’s called “quantitative easing.”

The Bank of Japan sliced its interest rate to near zero and pledged to buy $60 billion in assets. And Charles Evans, president of the Chicago Federal Reserve, told the Wall Street Journal that low inflation and high unemployment should prompt the Fed to take action.

That put Evans in a growing line of Fed officials who have argued publicly for further easing.

“The combination of bad data and very pointed comments by Fed officials leave one to believe that the Fed will be launching a ‘quantitative easing rocket’ in the near future and traders don’t want to miss the ride,” said Kevin Giddis, president of fixed income capital markets at Morgan Keegan, in a note to clients.

By continuing to push long-term interest rates lower, the Fed’s actions will encourage investors to put money into other assets like stocks and commodities, driving their prices higher. That could stimulate a bit more price inflation, which the Fed has said is too low.

Treasury yields have been sliding for weeks as traders anticipate a move by the Fed after its next meeting on Nov. 3. But yields could fall further still, said Tom di Galoma, head of fixed income rates trading at Guggenheim Partners. Action from the Fed and another batch of disappointing economic data could send the yield on the 10-year note below 2 percent in coming months, di Galoma said.

In late afternoon trading, the two-year Treasury note was sitting at $99.96 to yield 0.39 percent. The 10-year note was up 68 cents to $102.00 with a 2.39 percent yield.

The 30-year bond rose $1.43 to $103.71, with a 3.66 percent yield.

The three-month Treasury bill paid a 0.11 percent yield at a discount of 0.12 percent.

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