April 4 (Bloomberg) -- Treasuries rose, led by longer- maturity debt, after a government report showing the U.S. lost more jobs in March than analysts forecast reinforced speculation the economy is in a recession.
The gains pushed down yields on two-year notes as traders raised bets the Federal Reserve will cut the central bank's target lending rate by as much as a half-percentage point this month. Debt due in 10 years and more rallied as average hourly earnings increased by the smallest amount since March 2006, easing concern that inflation will accelerate.
``We're seeing weak employment and job losses in the services side of the economy and not just in manufacturing,'' said Michael Materasso, co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, which manages $141 billion of bonds. ``The economy does need lower short-term rates and the Fed will go along with that.''
The yield on the two-year note fell 7 basis points, or 0.07 percentage point, to 1.84 percent at 10:54 a.m. in New York, according to bond broker Cantor Fitzgerald LP. The price of the 1 3/4 percent security due in March 2010 rose 6/32, or $1.25 per $1,000 face amount, to 99 26/32.
The 10-year note's yield fell 9 basis points to 3.59 percent, the biggest drop since March 19. The difference in yields with two-year notes was 164 basis points, the least since Feb. 4.
The premium investors demand to hold inflation-linked securities compared with nominal debt declined for a third day. The so-called breakeven rate on 10-year Treasury Inflation Protected Securities dropped 4 basis points to 230 basis points.
`Back Into Play'
U.S. employers eliminated 80,000 jobs in March, compared with a revised 76,000 decrease in February, the Labor Department said in Washington. Economists had expected a loss of 50,000, according to the median of 79 forecasts in a Bloomberg News survey. The jobless rate rose to 5.1 percent from 4.8 percent.
Traders see a 38 percent chance the Fed will lower the target rate for overnight lending between banks a half- percentage point to 1.75 percent at their next scheduled meeting on April 30, up from 20 percent yesterday. The rest of the bets were on a quarter-point reduction, according to interest-rate futures on the Chicago Board of Trade.
``It puts the Fed a little more back into play,'' said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, one of the 20 primary dealers that trade with the central bank. ``It looks more and more likely the Fed's going to 1.75 and I would say the two-year note should probably stay anchored around that level.''
`Significant' Risks
Fed Chairman Ben S. Bernanke acknowledged for the first time on April 2 that a recession is possible because homebuilding, employment and consumer spending will deteriorate.
San Francisco Fed Bank President Janet Yellen said late yesterday the economy faces ``significant'' risks and officials must be ready to respond.
Yields on two-year notes rose to a five-week high April 2, jumping 10 basis points to 1.895 percent, after a private report by ADP Employer Services showed companies unexpectedly added 8,000 jobs in March. Yields on 10-year notes climbed to a three- week high of 3.55 percent after the release, which doesn't reflect hiring by government agencies.
Two-year yields increased 21 basis points the previous day, when UBS AG and Lehman Brothers Holdings Inc. said they would raise capital. Banks and securities firms have raised $136 billion by selling stakes or announcing plans to do so amid $232 billion of losses on subprime-related securities since the start of 2007.
``Himalaya-Like Guestimates''
Writedowns among the world's biggest financial institutions won't match ``Himalaya-like guestimates'' of more than $600 billion and will slow in the second and third quarters of this year, according to Lehman.
Financial firms will likely announce another $100 billion in writedowns by the year's end, Lehman Brothers analysts led by New York-based Jack Malvey wrote in the note.
Treasuries have returned 3.4 percent so far this year, the best gain since 2000, as credit-market losses drove investors to the relative safety of government debt. The biggest decline in yields so far this year was Jan. 22, the day policy makers cut the benchmark rate in an emergency decision. Two-year rates fell 35 basis points and 10-year rates fell 20 basis points.
The Fed last cut its rate by three-quarters of a percentage point March 18. Two days before that, it said it would lend cash directly to investment banks, and reduced the interest rate on direct loans by a quarter-percentage point. In an emergency decision March 16, the Fed also voted to authorize a loan against $29 billion of Bear Stearns Cos. assets so JPMorgan Chase & Co. would buy the company.
Bill Rates
Rates on three-month bills, considered among the safest securities because of their short maturities, dropped 5 basis points to 1.34 percent. They surged 80 basis points last week, the biggest increase in a five-day period since 1982. They touched 0.387 percent March 20, the lowest level since at least 1954, as investors lost confidence in financial markets.
The rise in bill rates narrowed the difference between what banks and the U.S. government pay for three-month loans, a gauge of credit risk. The gap is 1.38 percentage points, compared with a three-month high of 2.03 percentage points March 19.
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