US Treasuries soared on Friday as strikingly weak employment data cast doubt on the prevailing view that economic growth would rebound strongly from last quarter's slowdown.
US employers added a meagre 32,000 workers in July, well short of forecasts of around 228,000, prompting investors to rethink their expectations for how quickly the Federal Reserve might raise interest rates this year.
While most analysts still expect a quarter percentage point hike at the Fed's meeting next week, they see a significant chance that the pace of moves will slow thereafter.
The benchmark 10-year note leaped 1-15/32 in price, sending yields crashing to 4.22 percent from 4.41 percent late Thursday. At one point yields sank as far as 4.16 percent, the lowest level since April and a world away from the 4.65 percent highs hit just last month.
"Much weaker-than-expected non-farm payroll data has forced the market to shift the expected path of Fed tightening down," said Mark Mahoney, Treasury market strategist at UBS in Stamford, Connecticut.
Interest rate futures now show investors betting that rates will be at 2.00 percent or less by year-end and that the pace of tightening will slow further in 2005.
Likewise, short-term yields, which are the most sensitive to the outlook for official rates, shifted lower to reflect the new reality. Two-year yields slid 23 basis points to 2.39 percent, the biggest one-day fall in almost a year.
"If we get another jobs report as weak as this, there's no way the Fed will hike in September," said James Glassman, senior economist at J.P. Morgan.
The Fed has four more meetings left this year and the market had thought it would raise rates at each one, taking them to 2.25 percent in time for Christmas.
"The apparent slowing of the economy also suggests that the inflation scare of recent months was premature," said Glassman. "That in turn suggests it's safe to re-enter the carry trade."
Five-year notes climbed 1-1/32 in price, driving yields down to 3.38 percent from 3.61 percent on Thursday. Thirty-year bonds rose 1-26/32, while their yield dropped to 5.04 percent from 5.17 percent.
Borrowing at low short-term rates to buy higher-yielding long-dated paper has been a favoured trade in recent years but had been going out of fashion as the Fed talked about raising rates to more neutral levels.
The first sign of a revival in this carry trade was a steepening in the yield curve, with the gap between two- and 10-year yields widening seven basis points to 1.86 percentage points.
Not only were the July jobs figures disappointing, but June's rise was also revised down to 78,000 from the original 112,000. The unemployment rate did dip to 5.5 percent from 5.6 percent but was overshadowed by the payrolls figures.
"I find this number stunning," said Stephen Stanley, chief economist at RBS Greenwich Capital at Greenwich, Connecticut. "One bad number in June could be written off, but two in a row - obviously, there's something more fundamental going on."
The weakness in jobs would be a particular blow to Fed Chairman Alan Greenspan given the unambiguously optimistic outlook on the economy he presented to the House in testimony last month.
Equities also took the data hard, with the Standard & Poor's 500 index shattering major chart support to hit its lowest level this year - a very bearish event, according to analysts.
The slump made fixed-income debt more attractive in comparison and, if sustained, threatened to be a drag on the economy by crimping investor wealth and business confidence.
Comments
Comments are closed.