Weak jobs report drives interest rates lower; Fed to the rescue again?

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The government’s disappointing report Friday on July employment is fueling another rush by investors to lock in yields on bonds, even with rates on some securities already at record lows.

If the economic recovery keeps losing momentum many investors figure bond yields can only keep falling. That will require more buyers to continue piling into the market, but so far this summer that hasn’t been a challenge.

Plus, the betting now on Wall Street is that the Federal Reserve will launch a new program to try to pull down longer-term interest rates -- including mortgage rates -- most likely by resuming purchases of Treasuries and perhaps mortgage-backed bonds for the central bank’s own portfolio. The Fed bought $1.7 trillion of bonds from December 2008 through March of this year, trying to tug long rates lower.

The central bank’s normal policy move to help the economy is to cut short-term rates, but those already are near zero. So it’s out of bullets when it comes to short rates.

The Fed will hold its midsummer meeting Tuesday.

In the wake of the jobs report, the 10-year Treasury note yield has tumbled to a 15-month low of 2.82% from 2.91% on Thursday. The previous low was 2.88% on July 21.

Just four months ago the 10-year T-note was near 4%.

The two-year T-note eased to a record low of 0.51% Friday, down from 0.52% on Thursday and 0.75% in mid-June.

The private sector of the economy created only a net 71,000 new jobs last month, fewer than analysts’ consensus expectation of about 90,000. And the June gain in private-sector jobs was revised down to just 31,000 from the previous estimate of 83,000.

The dismally weak employment numbers confirm what many other reports have shown in the last two months: The economy still is growing, but it has slowed markedly since spring.

“The details of the latest monthly labor market data reflect an economy that is stuck in low gear and may be on the verge of stalling,” said Steven Ricchiuto, economist at Mizuho Securities USA.

“The loss of upside momentum in the economy suggests that more stimulus is needed, and with fiscal policy constrained by the size of the structural [federal] budget deficit, monetary policy needs to lead the way,” he said.

Goldman Sachs & Co. economists also predicted that the Fed would try to ride to the rescue. Goldman expects an initial modest program of bond purchases to be announced on Tuesday, with more to come later this year or in early 2011.

“We expect the [Fed] to respond to renewed upward pressure on the unemployment rate with another round of unconventional monetary easing,” the firm said in a report Friday. “These measures could involve more asset purchases -- probably Treasury securities -- and/or a more ironclad commitment to low short-term policy rates.”

On the latter point, the Fed could commit to keeping short-term rates near zero for a specific period -- say, through mid-2011 -- rather than stick with its current (and more vague) pledge to maintain low rates for an “extended period.”

As for longer-term rates, whether another drop in bond yields and mortgage rates would do much to help the economy isn’t certain. But the consensus view on Wall Street is that the Fed will have no choice but to try.

-- Tom Petruno