Long-Dated Notes Up on Monetary Easing

Longer-dated U.S. Treasurys prices advanced Thursday ahead of what is expected to be a weak U.S. employment report and after European central banks aggressively cut interest rates.

Two-year notes did not participate in the rally. Their yields are already below the Federal Reserve's benchmark federal funds rate of 1.0 percent, though that rate is widely expected to be cut by another half-percentage point next week and perhaps to zero in January.

Analysts noted, however, that the Fed cannot cut short-term interest rates any lower than zero.

In contrast, they said, the Fed had indicated, most recently in comments by Fed Chariman Ben Bernanke that the Fed could directly purchase "substantial quantities" of longer-term securities issued by the U.S. Treasury or government-sponsored agencies to lower yields and stimulate demand.

"The Fed has limited scope to cut short-term rates, but the Fed has said it may begin targeting long-term interest rates so one has the Fed on one's side when purchasing long-term maturities right now," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. in New York.

"Those who would short long-term Treasurys are fighting against the Fed's balance sheet and no one can win against that," he said.

Benchmark 10-year Treasury notes traded up 11/32 in price for a yield of 2.61 percent. Benchmark yields, which trade inversely to prices, fell as low as 2.54 percent overnight, the lowest in over five decades.

Thirty-year bonds were up 1-5/32, their yields easing to 3.10 percent from 3.16 percent on Wednesday.

The prospect of such actions by the Fed came against a background of a fresh round of global monetary easing.

The European Central Bank made its biggest ever cut to interest rates on Thursday, reducing benchmark credit costs by 75 basis points as it forecast a gloomy year ahead for the recession-bound euro zone economy.

That rate cut, though big by ECB standards, was tame compared with a 100 basis point cut by the Bank of England, 150 points by the Reserve Bank of New Zealand and 175 basis points by Sweden's central bank earlier in the day.

A batch of weak U.S. economic data this week, meanwhile, have supported the outlook for further easing by the Fed, by conventional and so-called "quantitative" means.

Weekly job loss data from the United States showed the global reach of the problem all central banks are confronting as the number of U.S. workers on jobless benefits rolls hit a 26-year high.

On Friday the U.S. government is expected to report another sharp fall in U.S. employment. U.S. payrolls are estimated to have shed 340,000 jobs in November as weakening consumer and business demand prompted companies to cut jobs to reduce costs, economists polled by Reuters forecast.

With the U.S. economy mired in recession, which this week was declared to have begun in December 2007, the unemployment rate is estimated to have risen to 6.8 percent in November from 6.5 percent in October. That would be the highest jobless rate in 15 years.

Five-year Treasury notes rose 2/32 in price, their yields easing to 1.60 percent from 1.61 percent late Wednesday.

Two-year Treasury notes were down 1/32 in price for a yield of 0.91 percent, versus 0.89 percent late Wednesday.

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