US interest rates likely to be kept at near zero

New York: Treasury two-year notes rose the most since August as the US economy unexpectedly lost jobs in December, signalling the labour market has yet to emerge from its worst slump since the Second World War.

The yield difference between 2- and 10-year US debt widened to near the most ever before the Treasury sells $84 billion (Dh308.53 billion) in notes and bonds this week. Minutes of the Federal Reserve's December meeting released January 6 showed policy makers intend to keep interest rates near zero for an extended period and said more stimulus "might become desirable".

"The employment data was disappointing from an economic standpoint and shows the recovery has been tepid at best," said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. "The consequence for the Treasury market is steepening, led by the front end as the Fed won't move until employment get much better."

The two-year note's yield fell 17 basis points on the week, or 0.17 percentage point, to 0.97 per cent, according to BGCantor Market Data. That's the most since it fell 25 basis points over the five days ended August 14. The 1 per cent note maturing in December 2011 rose 10/32, or $3.13 per $1,000 face amount, to 100 1/32.

The yield curve touched 287 basis points on Friday. It reached 288 basis points on December 22 amid concern an accelerating recovery would hurt demand at sales of US debt. Two-year note yields dropped below 1 per cent Friday after the Labour Department said employers eliminated 85,000 positions last month, compared with a median estimate of economists surveyed that projected no change.

The unemployment rate was unchanged from November at 10 per cent. The participation rate, or the share of the population in the labour force, fell to 64.6 per cent, a 24-year low.

Had the labour force not decreased by 661,000 last month, the jobless rate would have been 10.4 per cent, according to David Rosenberg, chief economist at Gluskin Sheff & Associates in Toronto.

The jobs report "can only be described as horrible," Rosenberg wrote Friday in a note to clients. "A big problem emerged for the bond bears and Fed hawks, which is that the ‘gaps' in the labour market are widening."

The underemployment rate — which includes part-time workers who'd prefer a full-time position and people who want work but have given up looking — rose to 17.3 per cent in December from 17.2 per cent.

Fed Bank of Boston President Eric Rosengren said unemployment will stay "quite elevated" while the economy recovers, warranting continued low interest rates.

Employment growth "will not likely be rapid enough to put a large dent in the unemployment rate," Rosengren, who votes on Fed policy this year, said in a speech in Hartford, Connecticut on Friday. "This should allow for accommodative monetary policy to continue to support the economy until the underlying demand of consumers and businesses becomes self-sustaining."

The minutes from last month's Fed's meeting showed policymakers debated increasing asset purchases should the economy weaken and predicted unemployment will be high for "some time".

The central bank said after its December 15-16 meeting that it will continue purchases of agency mortgage-backed securities totalling $1.25 trillion and about $175 billion of agency debt through the first quarter.

Bill Gross, who runs the world's biggest mutual fund at Pacific Investment Management Company, said the economy is too fragile for the Fed to back away from its stimulus measures.

The Treasury will sell $10 billion of 10-year Treasury Inflation Protected Securities (Tips) today, $40 billion of three-year notes on January 12, $21 billion of 10-year securities on January 13 and $13 billion of 30-year debt on January 14.