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July 31 (Bloomberg) -- Treasury notes gained for a fourth consecutive month, pushing two-year yields to the lowest ever, as data that showed U.S. economic growth is cooling fueled demand for the safest securities.
The two-year yield fell for a ninth straight week, the longest since February 2008, as a report yesterday showed gross domestic product expansion decelerated to an annual rate of 2.4 percent rate last quarter, lower than forecast. A Federal Reserve report July 28 underscored central bankers’ view that the recovery is progressing more slowly. U.S. payrolls shed jobs in July for a second month, a report next week may show.
“There’s concern about growth being low for an extended period,” said Michael Cloherty, interest-rate strategy head in New York at Royal Bank of Canada, one of 18 primary dealers that trade with the Fed. “That’s the theme that keeps pushing things along. We’ll need continued bad news to extend this rally.”
The two-year yield dropped 4 basis points on the week, or 0.04 percentage point, to a record low of 0.5461 percent yesterday in New York, according to BGCantor Market Data. It has declined 6 basis points in July and 22 basis points since the week ended May 28.
The 10-year note yield fell 9 basis points on the week and 26 basis points this month to 2.91 percent. The 30-year bond fell for the first month since March, with its yield rising 10 basis points to 3.99 percent.
Growth in gross domestic product from April through June decelerated from a revised 3.7 percent pace in the first three months of the year and from 5 percent in the last quarter of 2009, Commerce Department data showed yesterday. The median forecast in a Bloomberg News survey was for a 2.6 percent rate.
“The moderate recovery looks likely to continue but for now, at least, risks to growth are skewed to the downside,” Zach Pandl, an economist at primary dealer Nomura Holdings Inc. in New York, wrote in a note to clients. “The report’s many details were on net a negative for the economic outlook.”
The Fed’s regional business survey, known as the Beige Book, said that over the past two months “nearly all districts reported sluggish housing markets” since a tax credit for homebuyers expired April 30. Several of the bank’s 12 districts reported manufacturing “slowed or leveled off.” Still, it said, “economic activity has continued to increase, on balance, since the previous survey.”
The survey was issued two weeks before the central’s bank’s next policy meeting, scheduled in 10 days.
Treasuries rose this week even as the U.S. sold $104 billion in 2-, 5- and 7-year securities. The $38 billion 2-year note offering drew a record low auction yield of 0.665 percent, and the $37 billion 5-year notes yielded 1.796 percent, the lowest level at an auction of the debt since December 2008.
U.S. employers eliminated 60,000 jobs in July, according to the median forecast in a Bloomberg survey before the Labor Department reports the data on Aug. 6. The economy lost 125,000 jobs in June in the first monthly decline this year.
The worst U.S. recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to the Commerce Department’s annual revisions, issued yesterday. The economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the report showed.
Fed Chairman Ben S. Bernanke said last week the central bank is prepared to take further policy actions if the world’s largest economy “doesn’t continue to improve.” The Fed cut the benchmark interest rate to a record low range of zero to 0.25 percent in December 2008 and bought $300 billion in Treasury securities, in addition to purchasing housing-agency and mortgage-backed securities, as a tool of monetary policy.
The central bank should resume purchases of Treasuries if the economy slows and prices fall, Fed Bank of St. Louis President James Bullard wrote.
“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard wrote in a research paper July 29 about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”
A resumption of such purchases isn’t on the horizon, according to primary dealer Citigroup Inc.
“Further balance-sheet expansion is unlikely given the concerns around size of current balance sheet and the diminishing returns to further asset purchases,” Citigroup strategists led by Amitabh Arora in New York wrote in a report issued yesterday.
Fed’s Balance Sheet
Assets on the Fed’s balance sheet totaled $2.33 trillion as of July 28, according to central bank data.
Futures on the CME Group Inc. exchange yesterday showed traders have reduced the probability that policy makers will raise their target rate for overnight lending between banks to 33 percent by April, from 54 percent a month ago.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, yesterday narrowed to 1.76 percentage points from this year’s high of 2.49 percentage points in January. The five-year average is 2.13 percentage points.
To contact the reporters on this story: Susanne Walker in New York at email@example.com; Daniel Kruger in New York at firstname.lastname@example.org;