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Weak Economy Pushing Rates Lower Than Fed Easing

Wednesday, 1 Jun 2011 | 11:23 AM ET

Bad news on the economic front is ironically pushing interest rates lower than the Fed's quantitative easing program managed to.

Interest rates
Interest rates

The yield on the 10-year Wednesday slid under 3 percent on the latest disappointing reports on jobs and manufacturing. The Fed's controversial quantitative easing program ends at the end of the month, and in theory was to keep rates low and force investors into riskier investments as the Fed scooped up $600 billion in Treasury securities.

But a series of negative economic reports and worries about sovereign debt in Europe have driven investors into U.S. Treasurys, even as the Congressional debt ceiling debate creates queasiness about future U.S. funding of the unwieldy federal deficit.

The 10-year yield was last at 3 percent in December 2010, just about a month into the Fed's asset purchase program. It has slid to a low of 2.34 percent in October, just before the Fed began the extraordinary easing program in November.

"It's psychologically significant. It's not technically significant. There are more critical levels here. However, psychologically, it's going to get noted. From a purely technical level more important was the 200-day moving average at about 3.045. That was also the 50 percent retracement of the range since the pre-QE2 low in yields. It's notable," said David Ader, chief Treasury Strategist at CRT Capital.

"Now as we sort of get to the end of this game, the Fed (bond purchases) has taken so much paper out of the market it's created liquidity issues" as buyers rush into the bond market, said Ader. "You can argue that finally QE2 is helping."

Buyers moved into bonds Wednesday, as stocks fell. The first piece of bad news was a startling ADP report that only 38,000 private sector jobs were added in May. While it does not have a direct bearing on the government's non farm payroll report Friday, ADP is watched for directional signals.

The second bit of bad news was a greater than expected dip in the ISM manufacturing survey to 53.5 from 60.4 the month earlier. A slowdown was expected, but economists were looking for 57.7.

Already, Goldman Sachs trimmed its forecast for Friday's report on May payrolls to 100,000 from 150,000, and Credit Suisse lowered its expectations to 120,000 from 185,000.

"The reason we got into QE2, the data was bad," said Ader. He said investors bought Treasurys on the weak data, and the 10-year was yielding 2.34 percent by October, 2010.

"We got QE2 and suddenly the data changed and we sold off. Here, it's the data getting us there. It really is the data and it's a shock. Nobody anticipated the magnitude of what appears to be the slowdown here," Ader said.

Questions? Comments? Email us at marketinsider@cnbc.com

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