Treasury Yields Keep Falling

NEW YORK (TheStreet) -- The decline of Treasury yields this week is a confirmation that the markets continue to fear a slowdown in the global economic recovery.

"People love the Treasuries right now," says Chris Shayne, CFA, senior market strategist at the BondDesk Group.

The benchmark 10-year Treasury note was rising 10/32 Friday afternoon, diluting the yield to 2.995%, as investors fled risky assets such as stocks and commodities in reaction to a weak jobs report. Earlier, it dropped to as low as 2.95%.

On Wednesday, the 10-year note fell below 3% for the first time this year in reaction to disappointing hiring and manufacturing data.

Over the last 30 calendar days or 22 trading days, the 10-year Treasury yield has fallen 30 basis points, beginning with the Standard & Poor's downgrade of Greece in May for the second time.

Adding fire to the knee-jerk reaction to the bad eurozone news has been the spate of weak U.S. reports over the past few weeks, beginning with the jump in initial claims for the April 23 week and ending this week with Friday's very disappointing jobs number.

"It is what it is," says CRT Capital Group's Head of Government Bond Strategy David Ader. "The data has been pummelingly weak over the last few weeks."

Ader had been among those who were expecting a weaker-than-expected jobs number on Friday, but it turned out to be even worse than he had expected.

"We saw labor, manufacturing, confidence, housing, and just a steady litany of weak surprises culminating into today."

The Bureau of Labor Statistics on Friday reported that nonfarm payrolls increased by just 54,000 on a seasonally adjusted basis in May, after rising by an average of 220,000 in the prior three months.

As investors shy away from risky assets in response to the weak economic news and funds shift positions, the flight to Treasuries has been contagious.

"It's consistent with what we typically see when there's economic distress," says Shayne of the BondDesk Group. "Wall Street tends to move as a group."

Market observers believe that Treasury yields can drop even further as the economy creates its own version of quantitative easing, after the Federal Reserve's QE2 program appeared to be ineffective in lowering yields.

"The economy will be creating its own version of lowering Treasury yields by virtue of its inability to generate organic growth above 2.5% without government transfer payments and temporary stimulus mechanisms [such as] tax holidays, accelerated depreciation," says Luminous Capital Partner Alan Zafran.

Interactive Brokers' Senior Market Analyst Andrew Wilkinson says it's taken $2.3 trillion in quantitative easing from March last year to June this year to lower unemployment by just 1%. He expects there to be heated debate among Fed officials on whether to introduce another round of quantitative easing. Ader thinks there's a one in four chance of a QE3.

"Even before the end of QE2, the economy is already cooling under its own steam," says Wilkinson.

Analysts believe that the 10-year Treasury yield can fall to as low as 2 ¾% this year.

The iShares Barclays 7-10 Year Treasury Bond Fund( IEF ) was rose 0.4% to settle at $96.94 and the iShares Barclays 1-3 Year Treasury Bond Fund( SHY ) ended flat at $84.34.

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-- Written by Andrea Tse in New York.

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