Treasuries have returned 8.1 percent this year as traders anticipate the Federal Reserve will extend interest-rate cuts next month. A report next week is forecast to show the unemployment rate in the U.S. touched the highest in 17 months.
``People are leaning toward a little more weakness in the job report, which will keep a solid bid in Treasuries until that notion is disproven,'' said William O'Donnell, head of U.S. government bond strategy in Stamford, Connecticut, at UBS Securities LLC, one of the 20 primary securities dealers that trade with the Fed.
The yield on the benchmark 10-year note decreased 9 basis points this week to 4.08 percent, according to bond broker Cantor Fitzgerald LP. The price of the 4 1/4 percent security due in November 2017 rose 3/4, or $7.50 per $1,000 face amount, to 101 3/8. Two-year yields also declined 9 basis points this week to 3.10 percent.
The median estimate of 58 economists surveyed by Bloomberg News is that the economy added 70,000 jobs in December, the fewest since September. The unemployment rate may rise to 4.8 percent, which would be the highest since July 2006. The Labor Department reports the statistics on Jan. 4.
`Wrong Place'
Fed funds futures contracts on the Chicago Board of Trade indicate a 90 percent chance the Fed will reduce its target rate for overnight bank loans a quarter-percentage point from 4.25 percent at its Jan. 30 meeting, up from 80 percent odds on Dec. 21.
``The fed funds rate is in the wrong place,'' Paul McCulley, a money manager at Pacific Investment Management Co. in Newport Beach, California, said in an interview on Bloomberg Television yesterday. ``Recessions are always about tipping points. That's what I worry about.''
McCulley said in a note on Dec. 27 the Fed will cut rates at each upcoming meeting to at least 3 percent.
Sales of new homes fell 9 percent to an annual pace of 647,000, and October sales were revised down to a 711,000 rate, the Commerce Department in Washington said yesterday. The median forecast of economists surveyed by Bloomberg was for a 1.6 percent decline.
`A Potential Recession'
``The argument for a potential recession has been fortified,'' said Andrew Harding, chief investment officer for fixed income in Cleveland at Allegiant Asset Management, which manages $18 billion. ``We'll see low rates for some period of time.''
Treasuries also gained on Dec. 27 after government reports showed a weaker-than-forecast gain in durable goods orders and jobless claims reached a two-year high. Riots in Pakistan after the assassination of former Prime Minister Benazir Bhutto added to investors' desire for the safety of government debt.
``Global uncertainty and unrest are usually good for Treasuries,'' said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee.
The Securities Industry and Financial Markets Association recommended trading of Treasuries close at 2 p.m. New York time on Dec. 31 and stay shut on Jan. 1 in Japan, the U.K. and the U.S. for New Year's Day.
Returns this year were the best since gaining 11.6 percent in 2002, according to indexes complied by Merrill Lynch & Co.
Libor Rate
Market rates for inter-bank loans have declined since the Fed, European Central Bank and three other central banks announced a combined effort on Dec. 12 to revive that market. The rates remain above the levels of July, before the collapse of the U.S. subprime-mortgage market caused banks to stop lending to all but the safest borrowers.
The rate banks charge to lend each other dollars fell, indicating they are less concerned about having funding at year- end. The three-month London interbank offered rate, or Libor, fell 13 basis points this week to a 22-month low of 4.73 percent, the British Bankers' Association said yesterday.
The gap between the Libor and overnight index swap rate, viewed as an indirect measure of the availability of funds in the money market, fell to 66 basis points yesterday, from as much as 106 basis points on Dec. 4, which was the widest since at least December 2001, as far back as Bloomberg compiles the data.
The gap averaged 11 basis points between 2001 and when credit market concern began mounting in August.
``Banks typically want to keep cash to themselves,'' Ajay Rajadhyaksha, head of fixed-income strategy in New York at primary dealer Barclays Capital Inc., said in an interview on Bloomberg Television. ``It's the fear of what may happen.''
The ``TED'' spread, the difference between what banks and the U.S. government pay for three-month loans, narrowed to 1.58 percentage points yesterday from 1.89 percentage points on Dec. 21.
