Bonds gain as jobless, GDP data fuel economic worry

NEW YORK: US Treasury debt prices rose on Thursday after higher-than-expected weekly jobless claims and an estimate of first-quarter growth that was below forecast reinforced recent evidence the economic recovery was slowing.

New US claims for unemployment benefits rose unexpectedly to 424,000 last week, the government said, marking the seventh straight week above the 400,000 level, indicating growth in the labor market was soft.

Meanwhile, the government's second estimate of first-quarter gross domestic showed growth unrevised at 1.8 percent, below forecasts for a reading of 2.1 percent.

"The economy is not growing so fast that it's creating so much job growth and bringing down unemployment claims," said Kevin Logan, chief US economist at HSBC Securities in New York.

Worries an economic recovery could be stalling bolstered the safe-have allure of US government debt, and benchmark 10-year Treasury notes last traded 8/32 higher in price to yield 3.11 percent, down from 3.14 percent late Wednesday.

Most Treasury debt yields are already trading near six-month lows as worries over the pace of recovery and the possibility of contagion from credit problems in Europe have fueled a bid for US debt.

Benchmark yields have dipped to 3.09 percent in three of the last seven trading sessions, which is the lowest since early December.

"We have to see this as a continuation of soft data that we have seen. There is no doubt the economy has slowed," said Robert Dye, senior economist at PNC Financial Services in Pittsburgh.

The lower yields Thursday may not bode well for the Treasury's auction of $29 billion of seven-year Treasury notes in the afternoon.

Sales of $35 billion of two-year notes Tuesday and $35 billion of five-year notes Wednesday were met with solid demand, surprising some analysts who had expected waning appetite for the debt at the current low yield levels.

"We've had two excellent auctions so far this week, which is all the more impressive given the relatively rich valuations. There's a saying in Treasury market circles that two good auctions in a week tend to spoil the third," said William O'Donnell, head of US Treasury strategy at RBS Securities in Stamford, Connecticut.

He added, however, that "we don't think that seven-year notes will spoil the party this week."

Treasuries also were supported Thursday by Federal Reserve plans to buy $5 billion to $7 billion of Treasury notes maturing from May 2015 through November 2016.

Ahead of the Fed purchase and the Treasury sale, seven-year notes were 7/32 higher in price to yield 2.42 percent, down from 2.46 percent late Wednesday. Seven-year notes in the when-issued market, considered to be a proxy for where the auction might settle, traded with a yield of 2.45 percent.

Two-year notes traded 2/32 higher in price to yield 0.52 percent, down from 0.54 percent late Wednesday, while 30-year bonds were 14/32 higher to yield 4.26 percent from 4.28 percent.

Copyright Reuters, 2011