U.S. government debt prices rallied Wednesday, sending benchmark yields to five-month lows, after weak housing and employment reports solidified bets that the Federal Reserve would cut interest rates this month.
Two jobs reports raised red flags ahead of Friday's pivotal government payrolls report, causing some to cut their estimates of the number of jobs added to U.S. payrolls in August.
A modest 38,000 increase in private employment in August reported by ADP's national employment survey prompted Deutsche Bank chief U.S. economist Joseph LaVorgna to cut his estimate of August job growth to 70,000 from 110,000. The median estimate for August nonfarm payroll job growth garnered in a Reuters poll published Friday stands at 110,000.
A 12.2 percent drop in an index of U.S. pending home sales in July, pushed the index to its lowest level since September 2001 when the U.S. economy was in recession, also drove bond prices higher.
"People are getting more scared about the economy slowing and that (pushed) bond prices up," said Richard Huber, economist at A.G. Edwards and Sons in St. Louis, Missouri. "The idea is that if the U.S. economy has already slowed, then maybe the Fed will need to cut interest rates."
U.S. stocks stumbled on the economic data, with the Dow Jones industrial average falling more than 1 percent, accelerating a safe-haven bid for high-quality Treasury debt.
The safe-haven bid was also a factor in early bond market gains, analysts said, after London interbank offered rates for overnight euro rates hit a six-year high.
"LIBOR rose overnight and that helped bond prices go up," Huber said, with the rise in LIBOR coming as stress in money markets intensified a day before a European Central Bank interest-rate decision.
The benchmark 10-year Treasury note rose 18/32 in price for a yield of 4.482 percent ,near the lowest yield since March, compared with 4.55 percent late Tuesday. Bond yields and prices move inversely.
The Fed is expected to cut its federal funds rate 25 basis points to 5.0 percent at its September policy meeting.
A Fed easing "is likely to assure that economic activity rises back to trend over the next year," LaVorgna said.
In August, seeking to calm financial market turmoil, the Fed pumped cash into the banking system and cut its discount rate by 50 basis points to 5.75 percent. But analysts said money market conditions remain difficult.
"LIBOR rates continue to reset substantially higher," LaVorgna noted, and the asset-backed commercial paper market "has completely shut down as its yields have been running 50 to 60 basis points above LIBOR."
Those dislocations "have the potential to spill over into the broader credit markets as well as the stock market," LaVorgna said.
Bond traders will focus next on the Federal Reserve's Beige Book release, due at 2 p.m.
After Fed Chairman Ben Bernanke said last week that the Fed would pay "particularly close attention" to the timeliest indicators, as well as to information gleaned from its business and banking contacts around the country, the Beige Book could influence bond prices more than usual.
The Beige Book, an anecdotal account of business conditions across the country drawn from industry sources, "is extremely timely, owing to its qualitative nature," LaVorgna noted.