Treasurys looked set to rack up the best weekly gain in months after the
Labor Department said Friday the U.S. unemployment rate rose to its highest in
four years.
Yields on the 10-year note , which move inversely to price, fell 1 basis
point, or 0.01 percentage point, to 3.45%. The yield was down from 4.11% a week
ago, the biggest drop since February.
The economy cut 51,000 jobs in July, the seventh month of a contracting labor
market. Analysts surveyed by MarketWatch forecast a median decline of 70,000
positions.
The nation's unemployment rate rose to 5.7%, compared with expectations for a
0.1-point uptick to 5.6%.
Treasurys had also received a boost Thursday on a report showing economic
growth was slower than expected in the second quarter and actually shrunk at the
end of last year.
"There's nothing I can put my finger on to give any impression of the economy
doing anything besides being very sluggish or moving towards contraction," said
Robert Tipp, chief investment strategist at Prudential Fixed Income Management,
which oversees more than $200 billion of bonds. "There is some value in
Treasurys here. The market is cheap given the economic situation."
Debt was also very sensitive to U.S. equity markets, which were weighed down
by General Motors' $15.5 billion loss and rising crude prices.
Fed futures
Analysts anticipate that the Federal Reserve will maintain its 2% target for
overnight interest rates when the central bank's policymakers meet next Tuesday.
Interest-rate futures are still priced for rate increases later this year.
"We may see slightly slower growth through next year, but they'll be shifting
to a rate-hiking policy once the malaise is taken out of the credit market,"
said Don Alexander, director of fixed income at Citigroup Global Wealth
Management, which oversees about $1.3 trillion in assets.
"Our view is 10-year yields will be higher at this time next year," he said.
Traders see a 43% chance that the Fed will raise interest rates to 2.25% at
its monetary-policy meeting scheduled for Sept. 16. A week ago, they estimated a
51% chance of a hike by then.
The November futures contract indicates the market is betting on a 32%
probability of a second interest-rate increase, to 2.50%, at the Fed's Oct. 28-
29 meeting, down from a 40% probability last week.
Bond investors found short-term debt more appealing than longer term
securities, pushing two-year note yields down 1 basis point Friday to stand at
2.50%.
The yield has dropped 20 basis points this week, the most since early June.
The gap between two-year and 10-year yields increased to 1.44 percentage
point, the steepest the yield curve has been since July 16 and an indication of
fewer bets on rate hikes.
U.S. manufacturing growth stalled in July, according to the Institute of
Supply Management's index, which read 50, the dividing line between expansion
and contraction. That was down from 50.2 in June, but not as bad as the 4.95
median forecast in a MarketWatch survey.
(END) Dow Jones Newswires
08-01-08 1542ET
Copyright (c) 2008 Dow Jones & Company, Inc.
