US Treasury debt yields may push below technical resistance levels next week if data on employment, services and home sales show the economy continues to struggle, boosting expectations the Federal Reserve will embark on another round of quantitative easing.
-- September payrolls numbers forecast flat from August
-- Benchmark 10-year note next resistance seen at 2.42pc
Investors are already raising the possibility the US central bank will announce another round of quantitative easing at its early November policy meeting. Such speculation was fuelled by the Fed's policy statement last week, which said it was "prepared to provide additional accommodation if needed to support the economic recovery."
Any such quantitative easing is largely expected to include an expansion of the Fed's balance sheet through purchases of increased amounts of Treasury debt. "It is looking increasingly likely that the Fed will announce a new round of quantitative easing, probably before the end of the year," said Paul Ashworth, senior US economist at Capital Economics in Toronto. "Our guess is that it will opt for a smaller scale open-ended program of set monthly purchases of Treasury securities, simply because that would be the least unpalatable option for the hawks on the Federal Open Market Committee," Ashworth said.
If data on September payrolls next week shows the economic recovery remains feeble at best, expectations for quantitative easing will rise, which should push bond prices higher, and yields lower. "We're not convinced yet that we get quantitative easing in November, but would keep the risk well priced in so that's a generalised bullish (Treasury curve) flattening bias assuming the data stays subdued or weakens further," said David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut.
The government will release nonfarm payrolls data for September next Friday at 8:30 am (1230 GMT). The median of forecasts from analyst polled by Reuters is for payrolls to have been flat last month after contracting by 54,000 jobs in August.
If Treasuries prices did climb next week, Ader sees price resistance for the benchmark 10-year Treasury note at the recent low yield mark of 2.42 percent, followed by 2.35 percent. It was trading on Friday with a yield of 2.51 percent.
Data next week which also could influence the Fed on whether to embark on quantitative easing includes August factory orders and pending home sales on Monday, along with a measure of the state of the vast services industry for September, to be released on Tuesday.
The median of forecasts is for factory orders to have dipped by 0.4 percent in August from a 0.1 percent gain in July, while pending home sales are forecast to have risen 3 percent from a gain of 5.2 percent in July. The Institute for Supply Management's services index is forecast to have risen slightly to 52.0 in September from 51.5 in August. A reading above 50 indicates expansion.
However, despite the potential for economic data to bolster bond prices, not everyone believes the risk is skewed toward more quantitative easing. "The market's impressive overall resilience recently clearly indicates that participants have, by and large, operated on the premise that it is mostly a matter of 'when' rather than 'if'," said Anthony Karydakis, economist at Commerzbank in New York. "Thus, the market may be vulnerable to any news that cast doubt on the expectation that more quantitative easing is a done deal," he said.
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