Bonds rally as investors seek safety

NEW YORK: US Treasury debt prices rallied on Thursday as recession fears sustained investors' avid appetite for safe-haven US government debt.

A minor drop in new US jobless claims evoked little market reaction. Remarks by European Central Bank President Jean-Claude Trichet (ECB) received more attention.

Trichet recognized a deceleration in the pace of economic growth in the last few months and said he anticipated moderate expansion in the months ahead. He called risks to the growth outlook "broadly balanced."

The bid for safe-have US debt briefly intensified after Trichet's remarks. The 30-year Treasury bond, up 1-2/32 in price before the Trichet headlines hit, was up 1-10/32 afterward. The 30-year yield fell to 3.83 percent from 3.90 percent late on Wednesday.

The US bond market has not seen as sharp a week-long drop in yields since the height of the global financial crisis.

Benchmark 10-year notes also rallied due to investors' concerns about economic outlook. Up 12/32 before Trichet's remarks, they were up 15/32 afterward. Their yields fell to 2.57 percent from 2.63 percent on Wednesday.

News that new US jobless claims fell 1,000 to 400,000 last week had no discernible impact. American receiving extended emergency jobless benefits fell by 42,042 to 3.72 million, adding fiscal restraint to the economy and threatening more of the same.

"People are falling off these ranks," said David Ader, head of government bond strategy at CRT Capital Group.

"Keep in mind the program of extended jobless benefits ends next June and so these 3.72 million people are either 'incentivized' to get work (the cold, cynical view) or suffer a tragic loss of support, a support that has the most effective multiplier impact of any government payments."

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.

In the euro zone, Italian and Spanish bond yields came back off 14-year highs on Thursday due to a well-bid Spanish debt auction and speculation that Japan's intervention to weaken the yen will inspire the ECB to revive its dormant bond-buying programme.

Signs that the euro zone debt crisis could soon swallow countries that are seen as "too big to fail" raised expectations that policymakers could soon act to temper the Italian and Spanish selloff.traction were fueled late last week by government data showing anemic US growth in the first half of the year.

Investors also considered the idea that the Federal Reserve might begin another Treasuries purchase program to aid growth.

The weekly jobless claims figures were the last economic report before Friday's Labor Department July employment data.

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