Treasury yields approach 3-month low on European slowdown signs

May 2 (Bloomberg) -- Treasury 10-year yields approached the lowest level in almost three months after a euro-area report showed manufacturing contracted in April, underpinning demand for the safest assets.

Treasuries extended gains after a private report showed U.S. employment increased less than forecast in April. The securities rose after German unemployment unexpectedly increased last month, adding to signs the debt crisis is spreading to Europe’s strongest economies. The Treasury, in its quarterly refunding announcement, said it will continue studying whether to sell floating-rate securities and bills with negative yields at government auctions.

“The soft data is starting to pile up,” James Collins, an interest-rate strategist in the futures group at Citigroup Inc. unit Global Markets in Chicago, one of 21 primary dealers that trade with the Federal Reserve. “What happened overnight in Europe is also in the background. We’re skewed toward lower yields.”

The 10-year note yield fell three basis points, or 0.03 percentage point, to 1.91 percent at 9:20 a.m. in New York, according to Bloomberg Bond Trader prices. The yield dropped to 1.88 percent on April 27, the lowest level since Feb. 3.

Companies in the U.S. added 119,000 workers in April, according to figures from Roseland, New Jersey-based ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for a 170,000 advance. Estimates of the 37 economists ranged from gains of 100,000 to 200,000.

Treasury Auctions

The Treasury announced it will sell $32 billion in three- year notes, $24 billion in 10-year debt and $16 billion in 30- year bonds on three consecutive days beginning May 8. The sizes are the same sold in each refunding month since November 2010. Quarterly refundings are held each February, May, August and November.

Maturing Treasuries available for reinvestment will total $36.7 billion, and the sales will raise $35.3 billion of new cash, Wrightson estimates.

The Treasury said it sees benefits in the issuance of floating-rate notes and a decision will be made “at a later date.” While there are good reasons to have negative yields at Treasury auctions, a department official said, no decision has been made and there are operational challenges.

A euro-region factory gauge based on a survey of purchasing managers slipped to a 34-month low of 45.9 from 47.7 in March, London-based Markit Economics said. A reading below 50 indicates contraction. German unemployment increased by a seasonally adjusted 19,000 to 2.87 million, the Nuremberg-based Federal Labor Agency said. Economists forecast a decline of 10,000.

‘Euro-Region Crisis’

“The re-emergence of the euro-region crisis and the poor data there is keeping a lid on Treasury yields,” said Eric Wand, a fixed-income strategist at Lloyds Banking Group Plc in London. “There will still be buyers of Treasuries until the situation in Europe is resolved and that should keep rates suppressed.” at least late 2014.

Fed Chairman Ben S. Bernanke said April 25 the central bank is ready to add to its stimulus if necessary, even after it upgraded its view of the economy.

Treasuries handed investors a return of 9.8 percent last year, according to Merrill Lynch indexes, as financial turmoil in the euro-region boosted demand for the safest assets. The securities are little changed this year.

HSBC Holdings Plc and Markit Economics said China’s Purchasing Managers’ Index for April advanced to 49.3 from a preliminary 49.1 reported on April 23 and a final 48.3 the previous month. A reading below 50 indicates contraction.

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