Treasuries climbed, pushing five-year note yields to the biggest weekly loss in more than a year, as investors sought safety amid European sovereign-debt turmoil and data showing the lowest U.S. job gains in nine months.
Benchmark 10-year note yields dropped the most in almost three months as the U.S. unemployment rate unexpectedly rose to the highest level in 2011. China raised interest rates for the third time this year, spurring concern growth will slow. The Treasury will auction $66 billion in notes and bonds next week as the Aug. 2 debt-ceiling deadline looms.
“Concerns coming from overseas have been exacerbated by concerns at home after the jobs report, and Treasuries have rallied,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “It seemed like we were coming through the economic rough patch, but this certainly takes the legs out of that hope.”
Yields on the five-year note tumbled 20 basis points, the most since the five days ended May 7, 2010, to 1.58 percent in New York, from 1.78 percent on July 1, according to Bloomberg Bond Trader prices. The 1.5 percent security due in June 2016 gained 31/32, or $9.69 per $1,000 face amount, to 99 5/8.
The benchmark 10-year note yield dropped 16 basis points, or 0.16 percentage point, the most since the week ended April 15, to 3.03 percent. Two-year yields slid eight basis points, also the biggest drop since April 15, to 0.39 percent.
Treasuries erased early losses yesterday after Labor Department data showed U.S. payrolls rose by 18,000 positions last month, versus a 105,000 gain forecast in a Bloomberg News survey. The jobless rate rose to 9.2 percent, from 9.1 percent.
May’s employment gain was revised to 25,000 jobs, less than half the advance initially estimated. Private hiring, which excludes government agencies, rose by 57,000 jobs, the weakest since May 2010. ADP Employer Services said on July 7 companies added 157,000 jobs in June.
The payrolls report “forces all the bond bears back to the drawing board,” said George Goncalves, head of interest- rate strategy at Nomura Holdings Inc., one of 20 primary dealers that trade Treasuries with the Federal Reserve. “This confirms that the data will remain soft and weak.”
President Barack Obama said in a televised appearance at the White House after the report the U.S. still has “a big hole to fill” in replacing jobs lost in the recession.
The data may add urgency to talks tomorrow, when Obama and Republican and Democratic congressional leaders will try again to agree on cutting deficits and raising the government’s $14.3 trillion debt ceiling. The Treasury says an accord is needed by Aug. 2 to avert a default on U.S. debt.
“There’s not much confidence that there’s a working plan to get the economy back on track, or confidence that there’s progress on the debt ceiling,” said Anthony Cronin, a Treasury trader at the primary dealer Societe Generale SA in New York.
U.S. lawmakers are likely to raise the nation’s debt limit by $1 trillion as part of a compromise that would include an equal amount in budget cuts, according to Citigroup Inc.
An agreement of that size would have “negligible” market impact because monthly government expenditures are about $107 billion, New York-based Citigroup Global Markets strategist Neela Gollapudi wrote in a research note yesterday to clients.
As the deadline approaches, the U.S. will sell $32 billion of three-year notes on July 12, $21 billion of 10-year debt on the following day and $13 billion of 30-year bonds on July 14. The sizes are unchanged from the June sales of the securities.
The Fed has held its target for overnight lending between banks at zero to 0.25 percent since December 2008 to support the economy. It completed a $600 billion bond-purchase program in June to stimulate growth and continues to reinvest maturing bond proceeds into the market.
Treasuries rallied for two days, with 10-year notes ending a five-day rout, after Moody’s Investors Service cut Portugal’s credit rating on July 5 to Ba2, or junk. The move stemmed partly from “the growing risk that Portugal will require a second round of official financing before it can return to the private market,” Moody’s said.
The Iberian nation followed Greece and Ireland in seeking a bailout from the European Union. Treasuries fell last week as Greek lawmakers approved an austerity plan to win more aid.
Three-month Treasury bill rates dropped below zero this week for the first time since 2008. They reached negative 0.0051 percent before trading at 0.0203 percent yesterday.
“People came to the conclusion that this situation in Europe is not going away any time soon,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York.
China raised rates to combat inflation. Its one-year deposit rate rose to 3.5 percent from 3.25 percent, the People’s Bank of China said on its website. The one-year lending rate will increase to 6.56 percent from 6.31 percent.
“The China story is obviously a component to the nerves in the market,” said Paul Horrmann, a broker in New York at Tradition Asiel Securities Inc., an interdealer broker.
Treasuries have returned 0.7 percent in July after falling 0.3 percent in June, according to Bank of America Merrill Lynch’s Treasury Master index. The S&P 500 has gained 1.8 percent this month after falling 1.7 percent in June.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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By Seonag MacKinnon BBC Scotland education correspondent 
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