Treasuries set for steepest monthly gain since 2008 on economy

Treasuries headed for their biggest monthly gain since December 2008 before reports this week that are forecast to show employment and manufacturing slowed.

U.S. government debt returned 3.05 percent in August, Bank of America Merrill Lynch data show. Minutes of the Federal Reserve’s Aug. 9 meeting yesterday raised speculation the Federal Open Market Committee will debate further stimulus options at their September gathering. “QE3 is coming,” Goldman Sachs Group Inc. said in a report, advising investors to prepare for a third round of Fed asset purchases, also known as quantitative easing.

“Bernanke has basically flagged the fact that we’ll have to wait until the next FOMC meeting to see if there is indeed some further stimulus in the offing, and we’re still profiting from the pledge of the Fed to keep rates on hold towards mid-2013,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “That obviously very much underpins the structural low-yield environment for Treasuries.”

Benchmark 10-year notes yielded 2.18 percent at 7:04 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent note maturing in August 2021 traded at 99 17/32.

Yields have fallen about 1 percentage point since the end of June, and dropped to a record 1.97 percent on Aug. 18. They declined 62 basis points in August.

Best Since 2008

Treasuries had rallied 7.35 percent in 2011 as of yesterday, while an index of bonds around the world returned 4.4 percent, Bank of America figures show. The MSCI All Country World Index of stocks handed investors a 4.9 percent loss this year, according to data compiled by Bloomberg.

The last time Treasuries advanced this much was in 2008 as falling stocks and frozen credit markets drove U.S. government debt to a 14 percent gain for the year.

Companies in the U.S. added 100,000 jobs this month, compared with 114,000 in July, a Bloomberg News survey shows before ADP Employer Services reports the figure today.

The Institute for Supply Management will say tomorrow that its factory index fell, and Labor Department figures Sept. 2 will show hiring in the U.S. slowed, according to separate Bloomberg surveys of economists.

“Until confidence returns to the labor market, intermediate- and longer-dated Treasuries will muster an underlying bid into tactical weakness,” Lloyds Bank Corporate Markets strategists including Eric Wand in London wrote today in an e-mailed note.

Fed Minutes

Treasuries rose yesterday as minutes of the Fed’s most recent meeting indicated that a few policy makers favored more aggressive action to stimulate the economy and cut unemployment.

The report raised bets policy makers will consider further steps to bolster the economy when they convene on Sept. 20 for a two-day meeting that was originally scheduled to last a day.

“Minutes from the Aug. 9 FOMC meeting were consistent with our view that QE3 is coming,” Goldman Sachs economists led by Jan Hatzius wrote to clients following the minutes. The company, based in New York, is one of the 20 primary dealers authorized to trade directly with the Fed.

The central bank decided in November to buy $600 billion of Treasuries through June, following the $1.7 trillion first round of debt purchases that concluded in March 2010.

Treasuries outperformed most bond alternatives in the past few months, Bill Gross, who runs the world’s biggest debt fund at Pacific Investment Management Co., wrote on Twitter yesterday.

Gross Outlook

“Wish I had owned more!” wrote Gross, who is based in Newport Beach, California.

The comment reiterated remarks the Pimco head made in the Financial Times on Aug. 29, in which he said he made a mistake betting against U.S. government debt.

Yesterday Gross wrote on the Pimco website the world faces a possible “developed economy” recession. Pimco favors Canada, Australia, Mexico and Brazil because of their yields and balance sheets, the report said. Investors should also consider non- dollar currencies that have strong ties to Asia, Gross wrote.

Australian government debt returned 9.2 percent this year, matching New Zealand for the best gains among 20 developed markets tracked by the Bank of America indexes.

The $245 billion Total Return Fund has handed investors a 0.67 percent loss in the past month, lagging behind almost 90 percent of its competitors, according to data compiled by Bloomberg.

rbattin@dailyherald.com