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BLBG: Treasuries Head for Sixth Week of Gains on Outlook for Rate Cut
 
By Ron Harui



Oct. 3 (Bloomberg) -- Treasury two-year notes headed for a sixth week of gains, the longest winning streak since February, on speculation central banks will have to lower interest rates to avert a global recession.

The yield was near the lowest in two weeks before a U.S. government report that economists estimate will show companies cut jobs in September for a ninth month. Federal Reserve Bank of Kansas City President Thomas Hoenig said the economic situation is ``very serious.'' Futures traders are betting on a 0.5 percentage-point reduction by the Fed this month.

``The downside risks to U.S. economic growth are heightening and we may see an emergency rate cut by the Fed,'' said Kenichiro Ikezawa, who oversees about $3 billion as a fund manager at Daiwa SB Investments Ltd. in Tokyo, a unit of Japan's second-largest brokerage. ``Treasuries may strengthen.''

Yields on two-year notes, the most sensitive to monetary policy, were little changed at 1.64 percent as of 6:40 a.m. in London, according to BGCantor Market Data. The 2 percent security maturing in September 2010 traded at a price of 100 22/32.

The rate dropped 46 basis points this week and reached 1.59 percent, the lowest since Sept. 18.

Ten-year yields were at 3.63 percent, declining 22 basis points for the week. A basis point is 0.01 percentage point.

The difference between two- and 10-year yields widened to 2 percentage points, close to the most since March 7, from 1.75 percentage points a week ago.

Job Cuts

U.S. employers cut 105,000 jobs last month, the most since March 2003, according to the median forecast of economists surveyed by Bloomberg News. The Labor Department's report is due at 8:30 a.m. in Washington. The unemployment rate held at a five- year high of 6.1 percent, a separate survey showed.

The House of Representatives is likely to vote today on the latest version of a $700 billion bank rescue plan, said Brendan Daly, a spokesman for House Speaker Nancy Pelosi. The U.S. Senate voted 74-25 on Oct. 1 in favor of legislation that links the rescue of the financial industry to an increase in bank-deposit insurance limits and tax breaks after the House rejected an earlier version of the bill.

``Even though the package is passed, the U.S. economy is very weak and incoming data suggest further weakness ahead because of the tightening of financial conditions which have occurred,'' said Tomoko Fujii, head of economics and strategy at Bank of America Corp. in Tokyo, in a Bloomberg television interview. ``Expectations of a Fed rate cut have intensified.''

The rally in Treasuries may deter investors given expectations the Fed will lower interest rates this month, said Kazuaki Oh'e, a debt salesman at CIBC World Markets Japan.

Sell Treasuries

Two-year yields fell to 36 basis points below the Fed's overnight lending rate between banks, the most since April.

``Investors are likely to sell debt as Treasuries have gained a lot,'' said Tokyo-based Oh'e at CIBC World Markets, part of the investment division at Canada's fifth-biggest bank. ``Bonds may weaken.''

The extra yield that two-year German government notes offer over similar-maturity U.S. securities was 1.64 percentage points, down from 2.01 percentage points on Sept. 15.

European Central Bank President Jean-Claude Trichet said yesterday that policy makers considered a rate cut after leaving borrowing costs at a seven-year high of 4.25 percent because financial-market turmoil is damping economic growth.

Global central banks are trying to loosen a seizure in the credit markets amid a reluctance among banks to lend on concern losses related to U.S. subprime mortgages will worsen and more financial institutions will fail.

Money Markets

The London interbank offered rate, or Libor, the rate banks charge each other for three-month dollar loans, climbed 6 basis points to 4.21 percent yesterday, the highest since Jan. 11, data from the British Bankers' Association showed.

The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, widened to 3.61 percentage points, the most since Bloomberg began compiling the data in 1984. It has more than trebled from a month ago.

Futures on the Chicago Board of Trade showed a 94 percent chance the Fed will reduce its target rate for overnight bank loans by a half-percentage point to 1.5 percent at its Oct. 29 meeting. Traders saw no chance a week ago.

``You've got to be fairly bullish in this environment on Treasuries,'' said Adam Carr, senior economist in Sydney at ICAP Australia Ltd., part of the world's largest inter-bank broker. ``Fears of recession are quite bullish. A 50 basis point cut from the Fed is priced in and Trichet has opened the door to a rate cut.''

To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

Source