Prices of short-dated US Treasuries gained slightly on Thursday on expectations that Friday's US payrolls data will argue for further asset purchases by the Federal Reserve to support the economy. Data on Thursday showing new US claims for unemployment benefits unexpectedly fell last week to the lowest in nearly three months did not alter the view that the economy is struggling to produce jobs.
"People are speculating that tomorrow's number could be weak enough to validate the speculation about quantitative easing," said David Coard, head of fixed income sales and trading at Williams Capital Group in New York. The two-year Treasury note yield marked a record low on Thursday, dipping to 0.36 percent from Wednesday's finish near 0.39 percent.
The steady trudge lower in yields has shrunk the difference between two-year rates and the Fed's recommended funds rate - now at zero to 0.25 percent - to the narrowest spread since mid-December 2008, at the height of the financial crisis. The reasons for the narrowing spreads differed, however, with a stampede for safe-haven US government assets driving short rates lower during the financial crisis in 2008 and the Fed's pledge to keep rates low for an extended period and its supplemental easing strategies pushing rates lower this time.
Coard said he had not expected the two-year yield to dip much below 0.50 percent but that Treasuries at current levels seemed overbought. "If I were trading two-year notes I would probably be more of a seller here, just because we have come a long way very quickly," he said. US benchmark 10-year Treasury notes traded unchanged in price on Thursday to yield 2.40 percent.
The median forecast from analysts polled by Reuters for September nonfarm payroll numbers due Friday morning is for an unchanged level of payrolls last month after employers shed 54,000 jobs in August. Separately, the Treasury on Thursday said next week it will auction a total of $66 billion of three-year notes, reopened 10-year notes and reopened 30-year bonds. The prospect of more supply likely weighed on prices at the longer end of the Treasury curve, Coard said. The 30-year bond traded 20/32 lower in price, its yield rising to 3.71 percent from 3.67 percent late on Wednesday.