Yields fall as global growth outlook falters

NEW YORK: US Treasuries rallied on Wednesday as Germany sold new bonds at record low yields, after weak factory data in Europe and Asia increased concerns about slowing global growth.

Short covering by investors betting on yield increases heading into Friday's highly anticipated US jobs report for September was seen adding to the Treasuries rally. Concerns after the first diagnosis of a patient in the United States with Ebola may have also added a safety bid.

Treasuries yields fell in line with German bund yields after dwindling demand cut factory activity across much of Asia and Europe in September, sending it to multi-month lows and raising the chances that global growth will slow in the months ahead.

Germany sold new 10-year bonds at record low yields of 0.93 percent on Wednesday.

Benchmark 10-year Treasuries were last up 9/32 in price to yield 2.45 percent, down from 2.51 percent on Tuesday.

The rally came even as a private employment report on Wednesday showed that US employment grew at a solid pace of 213,000 jobs in September.

A shortage of high quality collateral even after quarter-end also continued to disrupt the repurchase agreement market, where many bonds are trading at negative yields, or "special."

"We have record shorts in the front end of the market, there is no collateral around, repo is very high so people are getting squeezed on their financing," said Tom Tucci, head of Treasuries trading at CIBC in New York.

The federal funds rate fell for a second day to 7 basis points. The Federal Reserve is expected to guide this rate to the higher end of its 0-25 basis point range as it gets closer to raising interest rates.

Record demand for Treasuries at the New York Federal Reserve's reverse repurchase agreement operation on Tuesday, which is meant to help the central bank set a floor on short-term rates, resulted in the Fed paying no interest on the overnight loans for the first time.

Banks and investors bid more than the Fed's $300 billion daily limit for the first time, with $407 billion offered in total. Banks and the funds have previously been paid 5 basis points, or 0.05 percent, for the loan.