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U.S. 10-Year Treasury Rises for a 7th Day on Doubts of Faster Job Growth
Aug. 5 (Bloomberg) -- The U.S. 10-year Treasury note rose for a seventh straight day, its longest rally since March 2003, on speculation a government report tomorrow will show the economy added fewer jobs last month than forecast.
An industry report yesterday showed employment in the service sector, the largest part of the economy, was unchanged in July. Slower job growth may restrain the pace of increases in the Federal Reserve's benchmark interest rate. Policy makers cited ``improved'' labor market conditions when they raised the rate June 30 for the first time in four years.
``The market is generally prepared for a weaker number,'' said Ralph Axel, government bond strategist at HSBC Securities USA Inc. in New York. ``The market will react very strongly to a weaker-than-expected report. People will start to talk about the possibility of the Fed skipping a meeting.''
At 10:49 a.m. in New York the 4 3/4 percent Treasury note maturing in May 2014 increased more than 1/8, or $1.25 per $1,000 face amount, to 102 3/4, according to New York-based bond broker Cantor Fitzgerald LP. Its yield declined 2 basis points, or 0.02 percentage point, to 4.40 percent.
The yield is down from 4.56 percent on July 1, the day before the June employment report showed the economy added less than half the jobs forecast. The rally in the 10-year note is the longest since it gained for eight straight days in the period ended March 5, 2003.
The two-year note's yield, more sensitive to expectations for benchmark rate, declined 2 basis points to 2.62 percent. It is unlikely to exceed 3 percent this year, Axel said. HSBC is one of the 22 primary U.S. government securities dealers that trade with the Fed's New York branch.
Monthly Employment
The economy probably created 240,000 jobs in July, according to the median forecast of 74 economists polled by Bloomberg News, up from 112,000 jobs in June. From Dec. 5 to March 5, the 10-year note's yield fell to 3.85 percent from 4.38 percent as four straight employment reports fell short of expectations.
Treasuries rose yesterday after the Institute for Supply Management said its employment index declined last month to 50, from 57.4 in June. The number of companies adding workers fell to 18 percent, from 27 percent.
``People are staring to think that we're going through another slowdown like we did last year,'' said Edgar Peters, who oversees $15 billion as chief investment officer at PanAgora Asset Management in Boston. ``There's some anxiety about that, as well as the latest terror alerts.''
Deutsche Bank Securities LLC's chief U.S. fixed-income economist, Joseph LaVorgna, yesterday lowered his forecast for July tomorrow's jobs number by 25,000 to 225,000.
Investors are paring expectations for how much more the Fed will raise its target for the overnight lending rate between banks this year.
The yield on the December Eurodollar futures contract is 2.31 percent, down from 2.49 percent on July 27. The contract settles at a three-month lending rate that has averaged 22 basis points higher than the Fed's target for the federal funds rate over the past 10 years.
``There's a pretty good chance they're going to skip at least one meeting this year,'' said David Ging, a government bond strategist at Credit Suisse First Boston in New York, and another primary dealer.
A slow pace of rate increases by the Fed probably will keep Treasury yields in the same range they have occupied for the past four months, Ging said. The 10-year note's yield has ranged from 4.35 percent to 4.90 percent.
Investors still expect Fed policy makers to raise the so- called federal funds target to 1.50 percent at their next meeting on Aug. 10. Federal funds futures, which settle at the average rate for the month, yield 1.425 percent for August. With a rate increase to 1.50 percent on Aug. 10 the rate would average 1.42 percent for the month.
Weekly Claims
Treasuries rose even as the Labor Department said the number of first-time claims for unemployment insurance benefits fell. Initial claims for state unemployment insurance benefits dropped to 336,000 last week from 347,000 the previous week. Initial claims four weeks ago reached a three-year low of 309,000.
The 10-year note surged as much as 3/8 point Monday after the U.S. raised the terrorism alert level for financial institutions in Washington, New York City and northern New Jersey, citing intelligence on al-Qaeda plans to attack.
Investors speculate the threat of terrorism may derail a global economic recovery. Ten-year notes rose yesterday after a bomb exploded at the company that runs the Athens city highway, less than two weeks before the Olympic Games open in the Greek capital.
``There's an underlying bid that comes from the heightened terrorist fears, '' Credit Suisse's Ging said.
Oil prices near record highs may restrain consumer spending and slow economic growth, according to some investors. Crude oil for September delivery was at $43.19 per barrel after reaching a record $44.34 yesterday.
``Rising oil prices will hurt private consumption and household spending, which will have a significant effect on the economy,'' said Akira Takei, who helps manage the equivalent of about $9.2 billion in Tokyo at Fuji Investment Management Co., a unit of Japan's biggest bank by assets.
