US Treasuries prices rallied on Friday, sending two-year yields to record lows again as dismal jobs data rekindled speculation the Federal Reserve could consider new stimulus measures as early as next week. Private-sector job growth stagnated at anaemic levels last month. The overall situation was made worse by losses in government employment as temporary census workers were laid off while state and local governments also made cuts.
The news gave a lift to bonds, which investors usually favour in weak economic times and which could get an additional boost if the Fed were to revive its recent quantitative easing campaign of buying assets such as Treasuries to spur growth. Traders said it was not yet a foregone conclusion the Fed would take such measures, especially at next Tuesday's policy meeting, but the risk was that it would consider some kind of bond-positive measures if economic indicators didn't improve soon.
"I think the discussion will be had. I question the timing. I don't know that the timing of such a move will be announced as soon as the statement to this Fed meeting," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.
The two-year note, which is particularly sensitive to changing perceptions on Fed policy, was last up 1/32 in price, yielding 0.51 percent versus Thursday's close of 0.54 percent. The two-year yield hit a record low of 0.50 percent earlier in the session.
Based on the drop in yield, two-year notes had their best week since the end of June, as traders priced in the possibility the Federal Reserve will drive short-term rates lower this year and keep them there for some time. The benchmark 10-year note was last up 23/32 in price, yielding 2.82 percent versus Thursday's close of 2.91 percent. During the session, 10-year yields fell as far as 2.81 percent, their lowest since April 2009.
The 30-year long bond rallied a point in price at the session's highs. It was last up 30/32, yielding just under 4.0 percent versus Thursday's close of 4.05 percent. The upcoming Fed meeting could complicate the market's usual positioning ahead of government bond auctions.
Treasury will sell a total of $74 billion worth of bonds and most dealers would probably like to see prices cheapen before taking down the supply, which is how they usually approach auctions. The sales include three-, 10- and 30-year bonds. Achieving such a price concession may be difficult if traders become more convinced the Fed will announce something that hints at asset purchases in the future.
The approaching auctions are exacerbating the under-performance of 30-year long bonds, a sector, which often comes under particular pressure when offerings of this maturity are approaching. The 10s/30s spread has been hitting record highs on a daily basis in recent sessions, according to Reuters data. Some investors also have concluded that the more distant the threat of inflation becomes amid economic weakness, the more it hurts 30-year bonds in relation to other maturities.
Investors' apparent renewed love of Treasuries on Friday drove swap spreads wider as government bonds outperformed other fixed income sectors, and even drove the 10-year differential into positive territory for the first time in more than a week. The exception to this widening was the less-preferred 30-year sector, where the swap spread narrowed further into negative territory.