US treasury notes advance on slowdown fears

US treasuries advanced on expectations as government and private reports this week will show job creation slowed and manufacturing growth stalled last month.

Treasuries finished 2006 with their best six-month run since 2002 after the Federal Reserve stopped raising interest rates following 17 consecutive increases.

Economic growth slowed in the second and third quarters, driving notes higher as investors prepared for rate cuts in 2007. A report tomorrow may show manufacturing didn't expand last month.

"We think the contraction will continue in the manufacturing sector,'' said Stuart Thomson, a bond fund manager at Resolution Investment Management in Glasgow, Scotland. "We should see a better second quarter for bonds as the Fed is able to cut rates."

The benchmark 10-year note fell 1 basis point to 4.69 percent at 7:02 a.m. in New York, according to New York-based broker Cantor Fitzgerald LP. The price of the 4 5/8 per cent security due in November 2016 rose 3/32, or 94 cents per $1,000 face amount, to 99 15/32. Bond yields move inversely to prices.

Japan, Singapore, China, Thailand and Malaysia are closed for public holidays. The bond market's trade group is recommending a 2 pm close in New York to honor former President Gerald Ford, who died last week.

The report from the Institute for Supply Management may show a reading of 50, the dividing line between expansion and contraction, for December, compared with 49.5 in November, according to a Bloomberg News survey of economists.

The US economy added 115,000 jobs in December, compared with 132,000 in November, another Bloomberg survey showed before the government releases the figure on January 5.

The US expansion is slowing, though not enough to prompt the Fed to reduce borrowing costs in the coming months, said Purbaya Yudhi Sadewa, an economist at PT Danareksa Sekuritas in Jakarta, the biggest domestic investment bank and bond broker in Indonesia.

Reports showing gains in home sales, consumer confidence and manufacturing at the end of December pushed 10-year yields to their highest in almost eight weeks. "The central bank isn't in a hurry to cut rates," he said. "Yields will rise toward the end of the first quarter."

Interest-rate futures indicate investors see a 17 per cent chance the Fed will reduce its target for overnight loans between banks by a quarter percentage point at its March 21 meeting.

Wall Street's biggest bond-trading firms say treasuries will have the best gains in five years during 2007 because the Fed will reduce borrowing costs as the economy cools.

The pace of growth slowed to 2 percent in the third quarter from 2.6 in the second and 5.6 in the first. Two-year notes will return 5.1 percent and 10-year notes will gain 5.4 percent, according to the average forecasts in a Bloomberg News survey of the 22 primary government security dealers, which trade with the central bank.

Treasuries returned 3.1 percent last year, the seventh consecutive annual gain, according to data compiled by Merrill Lynch & Co.