Bonds jump as jobs data fans Fed stimulus bets

As job growth grounded to a halt in August, Goldman Sachs and a few other US primary dealers -- big Wall Street firms that do business directly with the Fed -- forecast the Fed's policy-setting committee might decide to extend the maturity of the US central bank's $1.65 trillion Treasuries holdings at its Sept. 20-21 policy meeting to boost the economy.

Traders piled into longer-dated bonds for a second day in anticipation of a Fed move known to as "Operation Twist." This involves the central bank selling its shorter-dated Treasuries and buying longer-dated issues with the goal to "twist" the long end of yield curve lower.

"There have been a lot of trades being put on as people look to jump ahead of a move from the Fed," said Thomas Roth, executive director of US government bond trading at Mitsubishi UFJ Securities USA in New York.

Some analysts estimated the Fed could reduce its shorter-dated Treasuries holding by $300 billion to $500 billion and use the money to buy longer-dated issues.

This amount would come on top of the $15 billion or so the Fed spends each month from the proceeds of its maturing mortgage-related securities.

The weak August jobs data will be "likely enough to spur Fed easing action at the September meeting," Goldman Sachs economists wrote in a note.

On above-average volume, the 30-year bond soared three points in price, briefly bringing its yield to its lowest since Feb. 2009.

Demand for long-dated bonds pushed the two-year to 10-year part of yield curve to its flattest level since March 2009.

Investor anxiety about a worsening economy and the debt crisis in Europe sparked a sell-off on Wall Street with major averages losing at least 1.6 percent.

PLENTY OF WORRIES

The latest US Labor Department payrolls report also ratcheted up pressure on the White House to come up with a bold scheme to create jobs. President Barack Obama is scheduled to unveil his jobs plan to Congress next Thursday. US employers added no new jobs in August, the worst jobs reading in nearly a year.

The Labor Department also said that there were 58,000 fewer jobs created on a combined basis in June and July.

"This is a very difficult environment. We are not in a recession, but we are 50 percent of the way there," said Joseph Balestrino, fixed income strategist with Federated Investors in Pittsburgh, which manages $355 billion in assets.

Given the precarious state of the US economy, Balestrino and other analysts see persistent demand for long-dated Treasuries knocking their yields into uncharted territory.

The bond market gave up some of the early gains as investors booked profits and dealers locked in the rockbottom yields on the corporate debt they expect to underwrite in the coming weeks, traders said.

Benchmark 10-year Treasury notes last traded up 24/32 in price with a yield of 2.05 percent, down 9 basis points on the day.

The 10-year yield is within striking distance of 1.976 percent, an intraday low set in mid-August, according to Tradeweb. That was the lowest level in at least 60 years.

"I don't think the 10-year note is expensive here," Balestrino said. In Treasury Inflation Protected Securities trading, the yield on 10-year TIPS touched minus 0.03 percent, down 8 basis points from late Thursday. This signaled that traders have slashed their expectations on long-term US economic growth and inflation.

Trading tapered off ahead of a three-day US holiday weekend. The US bond market will be closed on Monday in observance of Labor Day.

As of midday Friday, Treasuries volume was 16 percent above its recent average, according to bond broker ICAP.

Copyright Reuters, 2011