Long dated bonds rally on recession fears

NEW YORK: Longer-dated US Treasuries, particularly 30-year bonds, rallied on Wednesday as investors, fearing recession, sought safety in US government debt.

An index of US non-manufacturing activity showed growth slowed in July, while the government said factory orders fell 0.8 percent in June.

US private employers added 114,000 jobs in July, payrolls processor ADP said, a less discouraging report than some had anticipated, but tepid nonetheless.

"Employment growth ... is weak, but not anemic," said Swiss Re chief economist Kurt Karl.

Yields, which move in the opposite direction of prices, fell. The 30-year bond yield slid to 3.84 percent after falling below 4 percent on Tuesday for the first time since November.

Yields on benchmark 10-year notes fell to 2.58 percent from 2.63 percent on Tuesday, and more than half a percentage point below where they stood just four weeks ago.

One government bond strategist said fear that US sovereign debt would be downgraded played into the rally.

Others cited a slide in stocks, recession fears, and hopes the US Federal Reserve might become more accommodative to avoid recession or a potentially more dire outcome: deflation.

David Coard, head of fixed-income sales and trading at The Williams Capital Group in New York, cited "speculation" about another potential Fed program of buying large-scale assets to add more liquidity to the banking system to facilitate lending and encourage economic growth.

Another potential round of quantitative easing -- the Fed has executed two such programs already -- would likely focus on longer maturities, Coard said.

Bond prices have rallied and yields have sunk as investors sharply tempered their views of the economy's first-half growth and cut expectations for the second half.

While most analysts do not expect the Fed to start another round of monetary easing soon, they believe Fed officials at the Aug. 9 policy meeting could emphasize that they intend to keep short-term interest rates low for a very long time.

Nervousness about the impact of US fiscal restraint and pressure on the sovereign debt of Spain and Italy should help ensure brisk demand for next week's US Treasury refunding.

US and global stock market losses on Wednesday also supported the bid for safe-haven US government debt. European shares ended at an 11-month low. Major US stock indexes all fell. The S&P 500 index dropped for the eighth consecutive day.

Worries about eurozone debt also supported the bid for US Treasuries a day before two Spanish bond auctions seen as a key test of investor appetite.in securities next week: $32 billion in three-year notes, $24 billion in 10-year notes, and $16 billion in 30-year bonds. In when-issued trade, the securities yielded 0.39 percent, 2.23 percent, and 3.868 percent, respectively.

"There will be $24.4 billion of offsetting maturities for a net new cash need of $47.6 billion," said Ian Lyngen, government bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

Thursday's Labor Department report on weekly jobless claims is the last potentially market-moving report before Friday's Labor Department report on July employment.

Economists polled by Reuters estimated that Friday's report will show that private payrolls added 115,000 jobs in July, but total nonfarm payrolls expanded by 85,000 jobs.

Copyright Reuters, 2011