Treasuries Climb as Data Show Consumer Confidence Dropped, Inflation Low

Treasuries rose for a third day as reports showed consumer sentiment in July slumped to the lowest level in a year and inflation was restrained, stoking demand for the safety of government debt.

U.S. two-year note yields fell to a record low, dropping for the seventh straight week, amid speculation the Federal Reserve will keep borrowing costs near zero into next year as unemployment persists and consumers remain reluctant to spend. Data for June showed the year-over-year gain in core consumer prices matched the smallest since 1966.

“The low inflation and weakness in the consumer-confidence number are supporting the Treasury market today as the data continues to be choppy,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “The unemployment rate is still abnormally high and the growth picture is still uncertain, so consumers are feeling the pressure.”

The benchmark 10-year yield fell 7 basis points, or 0.07 percentage point, to 2.93 percent at 4:38 p.m. in New York, according to BGCantor Market Data. It slid 13 basis points for the week. The two-year note yield declined 2 basis points to 0.59 percent and touched its lowest level ever, 0.5765 percent. For the week, it decreased 4 basis points.

Stocks tumbled, with the Standard & Poor’s 500 Index plunging 2.9 percent.

Pimco Holdings

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., boosted holdings of government-related debt to the highest level in eight months.

The $234 billion Total Return Fund’s investment in the debt was increased to 63 percent of assets in June, from 51 percent in May, according to the website of Newport Beach, California- based Pimco. The firm’s U.S. government-related debt category can include conventional and inflation-linked Treasuries, agency debt, interest-rate derivatives, Treasury futures and options and bank debt backed by the Federal Deposit Insurance Corp., according to the website.

The Thomson Reuters/University of Michigan preliminary index of consumer confidence fell to 66.5 this month, the lowest since August, from 76 in June. The forecast in a Bloomberg News survey was for the reading to decline to 74.

The consumer price index slipped 0.1 percent in June, Labor Department data showed, a third straight monthly decrease. The so-called core rate, which excludes food and energy prices, increased 0.2 percent from May, versus a 0.1 percent gain projected by economists surveyed by Bloomberg News.

The year-over-year core rate rose 0.9 percent.

‘Underlying Theme’

“Inflation is very low and consistent with the idea that the Fed is continuing to shift their broader concerns to a potential disinflationary environment,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It’s all part and parcel of the same underlying theme of a low inflation story, which suggests the Fed leaves the zero interest-rate policy in place for longer.”

Central bank policy makers last month cut their outlook for inflation this year to a range of 1 percent to 1.1 percent, from 1.2 percent to 1.5 percent in April. A few officials expressed concern at last month’s policy meeting about “some risk of deflation,” according to minutes released July 14.

The Fed has kept its benchmark interest rate in a range of zero to 0.25 percent since December 2008. Futures on the CME Group Inc. exchange showed a 12 percent chance it will raise the target rate for overnight bank loans by at least a quarter- percentage point by December, compared with a 27 percent likelihood a month ago.

Global Demand

Global demand for long-term U.S. financial assets slowed in May from a month earlier as investors abroad sold stocks and accumulated Treasuries at the weakest pace in a year.

Net buying of long-term equities, notes and bonds totaled $35.4 billion for the month, compared with net purchases of $81.5 billion in April, the Treasury Department reported today. Total net foreign purchases of Treasury notes and bonds were $15 billion in May, the weakest level since May 2009 and down from $76.4 billion in April.

Long-term Treasuries are getting too expensive, said Colin Embree, a trader in Singapore at Bank of Nova Scotia Asia Ltd., part of Canada’s third-largest lender.

Embree said he’s considering setting bets against the securities if yields fall another 15 basis points. Ten-year yields dropped to 2.88 percent on July 1, a level not seen since April 2009.

Investors are seeking safety in shorter maturities because of concern global growth is slowing, keeping the difference between 2- and 10-year yields at a steep level, he said. The spread was 2.34 percentage points, more than double the average over the past 20 years.

“We’ve moved a long way in a short period of time,” said Tom Roth, senior Treasury trader in New York at Mitsubishi UFJ Financial Group Inc. “To maintain these low levels, we need a diet of bad news. Some days we get it.”

The U.S. lost jobs in June for the first time this year, government data showed July 2. The jobless rate is 9.5 percent.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

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