U.S. Treasury yields plummet to lowest level since 2009

Treasuries rallied, pushing the yield on the 10-year note to the lowest level since April 2009, on concern the economic recovery will remain slow.

U.S. debt gained as a report indicated inflation was contained last month and economists said the nonfarm payrolls report later this week will show employers eliminated 115,000 jobs in June. Group of 20 leaders said over the weekend that advanced economies plan to cut their deficits in half by 2013, allowing them to curb record bond sales.

“Economic growth for the balance of 2010 is going to be disappointing to a lot of people,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading in New York at Deutsche Bank AG’s private wealth management unit. “At the same time, inflation is benign. With the Fed on hold, maybe 3 percent on 10-year notes is not a bad trade for the next couple of months.”

The yield on the 10-year note decreased seven basis points, or 0.07 percentage point, to 3.04 percent at 2:16 p.m. in New York, according to BGCantor Market Data. It touched 3.03 percent, the lowest level since April 29, 2009. The price of the 3.5 percent security maturing in May 2020 gained 18/32, or $5.63 per $1,000 face amount, to 103 27/32.

Treasuries are the world’s third-best-performing government debt securities this quarter, having returned 4.05 percent, trailing 5.10 percent for Denmark and 4.32 percent for Britain, according to Bloomberg data.

Two-Year Note

The two-year note yield fell two basis points to 0.63 percent after earlier dropping to 0.62 percent, the lowest level since Nov. 27. The yield is approaching the record low of 0.6044 percent set Dec. 17, 2008, after the Federal Reserve cut its target for overnight lending to a range of zero to 0.25 percent.

The yield on the 10-year note will climb to 3.78 percent by year-end, according to the median estimate of 64 economists in a Bloomberg News survey. The yield on the 2-year note should increase to 1.32 percent, according to the median estimate in a separate survey.

The extra yield investors demand to hold 10-year notes over two-year securities, charted on the yield curve, fell today to 2.41 percentage points, the narrowest since May 26, when it touched 2.37 percentage points.

The yield curve plots the rates of bonds at different maturities, with a flatter curve reflecting increased demand for longer maturities from investors expecting lower economic growth and slower inflation.

‘Bull Flattener’

“The curve has gotten a bull flattener,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida, for SunTrust Banks Inc.’s private wealth management division. “The economic numbers are looking and coming in weaker than expected.”

Treasuries also rose as U.S. buyers sought longer-term securities to increase the duration of their portfolios to match their benchmarks at the end of the second quarter.

U.S. government debt extension increased by 0.06 years for July 1, compared with 0.09 years for June 1, according to Barclays Plc, one of 18 primary dealers that trade directly with the Fed. Duration measures how sensitive a bond’s price is to changes in yield.

Longer-term government debt was supported as a government report showed muted inflation.

The inflation gauge tied to spending patterns increased 1.9 percent from May 2009 after a 2 percent gain in the 12 months through April, the Commerce Department reported.

‘Room to Play’

“There was nothing in the data to disturb the trend of lower yields,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The move toward that view has more room to play.”

The Fed said on June 23 at the conclusion of its two-day meeting that the recovery pace is “likely to be moderate for a time” and reiterated its commitment to an “extended period” of low borrowing costs.

A lower-than-expected 431,000 new jobs for the U.S. in May included a 411,000 jump in government hiring of temporary workers for the 2010 census, the Labor Department reported on June 4. The payrolls report for this month is due on July 2.

President Barack Obama said the goal set by the G-20 nations of cutting deficits reflects U.S. targets and takes into account the fiscal and economic needs of each country. The White House projects the U.S. shortfall will be a record of almost $1.6 trillion this year. U.S. marketable debt has climbed to an unprecedented $7.96 trillion.

Global bond returns may have nowhere to go but down after the best first half since 2005.

The benchmark 10-year Treasury note has returned 7.85 percent this year, including reinvested interest, leading global government bonds to a gain of 3.36 percent, according to Bank of America Merrill Lynch indexes. That’s the best start since the firm’s broadest sovereign debt index rose 3.77 percent in the first half of 2005.