Economic worries push yields to 6-month lows

By Chris Reese

NEW YORK (Reuters) – U.S. Treasury yields dipped to six-month lows Thursday as data on weekly jobless claims added to recent evidence the economic recovery is stumbling, bolstering the safe-haven appeal of government debt.

Worries over persistently high unemployment, a struggling housing market and softness in manufacturing have pushed yields down since early April, with benchmark rates Thursday dipping to the lowest since early December.

Price gains were thwarted however as investors set up for an auction of $13 billion of reopened 30-year bonds. The sale will round out this week’s auctions of $66 billion of U.S. government debt.

Benchmark 10-year notes were trading with a yield of 2.95 percent, down from a high yield near 2.97 percent in an auction of $21 billion of reopened 10-year notes Wednesday. The yield dipped to 2.92 percent early Thursday, marking the lowest since early December.

Worries over the outcome of a debt crisis in Europe and ongoing Federal Reserve purchases of Treasuries under the program known as QE2, that will be completed on June 30, have also eroded yields.

“At this point in the cycle, everyone believed we’d be on the mend, but it looks like that’s not the case,” said William Larkin, portfolio manager with Cabot Money Management in Salem, Massachusetts. “We just need a couple of key warnings– on consumer confidence, energy prices, whatever– and markets could continue to weaken, which will further increase demand for ultra-safe assets.”

The government said Thursday that initial claims for state jobless benefits increased to 427,000 last week, which was above economists’ forecast of claims dropping to 415,000.

Separately, the government said the U.S. trade deficit narrowed unexpectedly in April, as U.S. exports rose to a new record and imports from Japan tumbled more than 25 percent in the aftermath of its earthquake, tsunami and nuclear disaster.

The Fed’s QE2 program is set to finish at the end of the month, but will continue Thursday with the U.S. central bank set to buy $6 billion to $8 billion of debt maturing December 2016 through May 2018.

Ahead of Thursday afternoon’s debt auction, 30-year bonds were trading 8/32 higher in price to yield 4.17 percent, down marginally from 4.19 percent late Wednesday.

In the when-issued market , the 30-year yield, considered a proxy for where the high yield might come in at the auction, was trading near 4.18 percent.