Treasurys gain on payrolls; Fed action seen as more likely

By Deborah Levine, MarketWatch



NEW YORK (MarketWatch) -- Treasury prices rose Friday, pushing yields on 2-year notes to a record low, after a weak report on the labor market raised expectations that the Federal Reserve may take steps next week toward using monetary policy to support the faltering U.S. economy.

"Bond market bulls will use a soft number to justify arguments for the Fed to reinvest proceeds from mortgage holdings, and to reinforce the argument that the risk of a double-dip [recession] is rising," said strategist at RBS Securities.


Yields on 10-year notes (UST10Y 2.86, -0.04, -1.45%) , which move inversely to prices, fell 6 basis points to 2.85%. They dropped as low as 2.83%, a fresh 16-month low. A basis point is 0.01%.

Yields on 2-year notes (UST2YR 0.52, -0.01, -2.25%) fell 2 basis points to 0.51%, recovering somewhat after having touched 0.49% -- the lowest level on record.

Yields on 30-year bonds (UST30Y 4.02, -0.03, -0.62%) also declined, down 4 basis points to 4.02%.


The Labor Department said private employers added 71,000 jobs in July, fewer than analysts expected. Including government employees, the economy lost 131,000 jobs. A smaller drop was anticipated, mostly due to the loss of temporary Census jobs. Read about payrolls.

"It was a pathetic report," said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners. "The revision on last month's payroll is troubling, and we believe the Fed will lean toward quantitative easing at next week's meeting."


The policy-setting Federal Open Market Committee is scheduled to meet Aug. 10.


Earlier this week, The Wall Street Journal said Fed policy makers will consider using cash from maturing mortgage-bond holdings to buy new mortgage or Treasury bonds instead of allowing its portfolio to shrink. The decision will likely depend largely on upcoming economic data -- including the July jobs report, the newspaper said.


Some see only a small chance that the Fed would take such a step because it may not help much. Also, many economists disapprove of so-called quantitative easing, which is effectively printing money and which devalues a currency.


Expectations for the Fed to say something next week could trigger a small rally, perhaps on the order of a decline of 10 basis points in 10-year note yields, said strategists at CRT Capital Group.


In an informal CRT survey earlier this week, respondents saw a 50-50 change that the Fed will institute another round of asset purchases, more likely to be Treasurys than mortgage debt. That kind of shift could prompt a 29-basis point drop in 10-year notes, CRT's survey showed.

In March 2009, the Fed surprised investors by announcing it would purchase Treasurys and more mortgage-related debt than it had already stated. That precipitated 10-year yields plunging 47 basis points -- the biggest single-day drop since the 1987 stock market crash.