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Treasury Five-Year Notes Advance as Bernanke Predicts Slow Growth in Jobs

January 9, 2011

Treasury five-year notes had the first back-to-back weekly gains since October as U.S. payrolls grew less than forecast and Federal Reserve Chairman Ben S. Bernanke said the labor market’s recovery will be gradual.

Yields on the notes touched the lowest level in two weeks yesterday after Labor Department data showed nonfarm payrolls expanded by 103,000 last month, versus a median forecast of 150,000 in a Bloomberg News survey. The Treasury will sell $66 billion in securities next week in the year’s first note and bond auctions.

“The five-year leads the way up, and it leads the way down,” said Brian Edmonds, head of interest-rates at Cantor Fitzgerald LP in New York, one of central bank’s 18 primary dealers. “The Fed chairman is setting expectations back further and making people aware that there aren’t a lot of quick fixes and it’s not going to turn on a dime.”

The yield on the five-year note fell five basis points yesterday, or 0.05 percentage point, to 1.96 percent, from 2.01 percent on Dec. 31, according to BGCantor Market Data. It touched 1.93 percent, the lowest since Dec. 21. The yield hadn’t declined for more than a single week at a time since Oct. 8.

Benchmark 10-year note yields rose three basis points to 3.32 percent, from 3.29 percent at the end of last week. Two- year note yields were little changed at 0.59 percent.

Quantitative Easing

Bernanke, in testimony yesterday to the Senate Budget Committee, defended his unorthodox program of buying $600 billion of Treasuries through June to spur employment and bolster the economic recovery. The plan is the second round of bond purchases in a strategy called quantitative easing, after a first round of $1.7 trillion in asset acquisitions.

The central bank also has held the key interest rate at zero to 0.25 percent since December 2008 to try to fuel growth.

“It could take four to five more years for the job market to normalize fully” at the pace of improvement that Fed officials project, Bernanke told senators.

Payrolls rose last month after a revised November gain of 71,000 jobs that was greater than previously estimated, Labor Department data showed yesterday. Private payrolls added 113,000 jobs in December, compared with a revised 79,000. The unemployment rate dropped to the lowest level since May 2009, 9.4 percent, partly reflecting a shrinking workforce.

Economists had upgraded forecasts for the jobs gain to 150,000 from 135,000 after ADP Employer Services said Jan. 5 that companies added 297,000 jobs last month, three times the number forecast in another Bloomberg survey.

‘Painfully Slow Growth’

“The recovery has been very sluggish, and the jobs report reflects a modest acceleration of painfully slow growth to grudgingly middle-of-the-road growth,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “Employment will continue to lag GDP from here.”

The U.S. economy expanded at a 2.6 percent annual rate in the third quarter, the Commerce Department reported on Dec. 22, compared with 1.6 percent in the same period a year earlier.

The Fed will purchase on Jan. 10 $6 billion to $8 billion of Treasuries due from February 2018 to November 2020, and the next day it will buy $7 billion to $9 billion of U.S. securities due from July 2016 to December 2017. It will announce additional purchases on Jan. 12.

Policy makers next meet on Jan. 26. At their Dec. 14 meeting they said the pace of economic gains had been insufficient to reduce joblessness and they would continue the bond-buying program, according to minutes released on Jan. 4.

‘Stand Down’

“For those that believed the Fed was going to look at today’s number, wave the flag and begin tightening, stand down,” Kevin Giddis, president of fixed-income capital markets at the brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote yesterday of the payrolls report in a note to clients. “Employment is lumpy and very uneven.”

Unemployment may lead the central bank to extend quantitative easing beyond the current plan, according to Vincent Reinhart, the Fed’s chief monetary-policy strategist from 2001 until September 2007.

“They want to be absolutely confident that the economy gets better,” Reinhart said Jan. 5 on Bloomberg Television’s “First Up” with Susan Li. “They’re going to have to make decisions in April and May about QE3, and they’re not going to get a whole lot of a different picture than they have right now.”

Pacific Investment Management Co.’s Bill Gross said that while he anticipates the end of the bull market in bonds, it’s not the beginning of a significant bear market as economic growth and government stimulus measures fail to translate into broader employment gains. Gross spoke in a radio interview yesterday on “Bloomberg Surveillance” with Tom Keene.

Note, Bond Auctions

The U.S. will sell $32 billion in three-year debt, $21 billion in 10-year securities and $13 billion in 30-year bonds on three consecutive days, beginning Jan. 11. The amounts are unchanged from last month’s sales of the maturities.

Consumer prices rose 0.4 percent last month after a 0.1 percent increase in November, economists in a Bloomberg survey forecast before the Labor Department reports the data Jan. 14.

The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, narrowed to 2.35 percentage points yesterday after touching 2.42 on Jan. 5, the widest since April. Its 2010 low was 1.47 percentage points in August.

To contact the reporters on this story: Susanne Walker

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