September 7, 2012 / 1:42 PM / 7 years ago

TREASURIES-U.S. jobs report rallies bonds, raises QE3 hopes

By Ellen Freilich
    NEW YORK, Sept 7 (Reuters) - U.S. Treasuries rallied on
Friday after a weaker-than-expected August U.S. jobs report
boosted hopes that the Federal Reserve would buy more bonds to
help shift the economy into a gear that could create higher
employment.
    Such purchases, dubbed QE3, or quantitative easing, would
form another phase of the unconventional monetary stimulus
measures the Fed has initiated as it attempts to rescue the
economy from the clutches of the financial crisis.
    "The weaker than expected job growth number caused U.S.
Treasuries to rally across the curve," Eric Stein, vice
president and portfolio manager at Eaton Vance Investment
Managers in Boston. "(It) all but guarantees the Fed will extend
the low (interest) rate guidance at next week's policy meeting
(and) makes QE3 a lot more likely."
    Treasuries opened lower on Friday, but moved into the plus
column immediately after the jobs report came out.
    The benchmark 10-year Treasury note, down 13/32
before the Labor Department report, was up 20/32 afterwards, its
yield easing to 1.62 percent from 1.69 percent late on Thursday
and 1.73 percent on Friday before the report was released.
    The government said U.S. payrolls added 96,000 jobs in
August. Economists had anticipated 125,000 new jobs.
    The unemployment rate fell to 8.1 percent in August from 8.3
percent in July, but economists said this was not a sign of
improvement, but a reflection of fewer people participating in
the labor force.
    "You can't read anything positive into the drop in the
unemployment rate because participation in the labor force also
declined," Stein said.
    Other factors - including a sharp drop in the length of the
manufacturing workweek and in manufacturing output, a fall in
manufacturing employment and a year-over-year 1.7 percent
decline in average hourly earnings - underscored the weakness of
the employment report and made Fed action more likely, boosting
bond prices and allowing yields to ease, economists said.
    "This is a bad report and, with the results of the ISM
manufacturing survey, suggests that an exports-led slowdown is
coming," said Cary Leahey, managing director and senior
economist at Decision Economics in New York. "It increases the
chances of serious Fed action next week."
    The rally followed a retreat on Thursday when job market
data looked more upbeat and European Central Bank President
Mario Draghi said the central bank will buy unlimited amounts of
short-dated bonds to help lower the borrowing costs of Spain and
Italy, which are bearing the brunt of the debt crisis in the
euro zone. 
    A drop in jobless claims in the week ended Saturday and the
ADP's report on private sector employment released on Thursday
lifted some market expectations, or the so-called  "whisper
number," for Friday's jobs figures and boosted buying in the
Treasury market when the data fell short of those expectations.
    The Fed will deliver the policy statement from its two-day
policy meeting next Thursday.
    Other closely watched events next week will include a ruling
by Germany's Constitutional Court on Sept. 12 on whether the
euro zone's permanent bailout fund is compatible with German
law, a vital condition for it to come into force.
    The Netherlands will hold elections the same day.
    The Treasury will also sell $66 billion in new supply next
week. The sales will include $32 billion in three-year notes on
Tuesday, $21 billion in 10-year notes on Wednesday and $13
billion in 30-year bonds on Thursday.
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