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Treasuries Gain as Growth Slows, Pushing 2-Year Note Yields to Record Low
Treasuries climbed, pushing two-year note yields to the lowest ever, as a government report showing U.S. economic growth slowed in the second quarter spurred demand for the world’s safest securities.
U.S. notes gained for a fourth month. Economic expansion cooled to a 2.4 percent annual pace last quarter, lower than forecast, Commerce Department data showed. Federal Reserve Bank of St. Louis President James Bullard said yesterday the central bank should resume purchases of Treasury securities if the economy slows and prices fall.
“The GDP report was lackluster and is pointing toward slower growth,” said James Collins, a Chicago-based interest- rate strategist in the futures division at Citigroup Global Markets Inc., one of 18 primary dealers that trade with the Fed. “Treasuries are certainly acting as though economic weakness will be the mainstay.”
The two-year yield dropped four basis points, or 0.04 percentage point, to a record low 0.5461 percent at 4:39 p.m. in New York, according to BGCantor Market Data. The price of the 0.625 percent security due in July 2012 rose 2/32, or 63 cents per $1,000 face amount, to 100 5/32. Ten-year yields tumbled eight basis points to 2.90 percent, a one-week low.
Two-year yields slid four basis points this week and six basis points in July. The 10-year note yield dropped nine basis points this week and three basis points this month. The 30-year bond had its first monthly loss since March, its yield rising 10 basis points to 3.998 percent.
GDP Growth
Growth in gross domestic product from April through June decelerated from a revised 3.7 percent pace in the first three months of the year, Commerce Department data showed. The median forecast in a Bloomberg News survey was for a 2.6 percent rate.
Real GDP growth will average slightly less than a 2 percent pace in the second half of 2010, according to Wells Fargo & Co.
“Our first look at the third quarter and second half of this year calls for an exceptionally weak third quarter,” Mark Vitner, a senior economist at the Wells Fargo Securities unit in Charlotte, North Carolina, wrote in a research report today.
The gap between yields on 10- and 2-year notes, known as the yield curve, touched 2.35 percentage points today, the narrowest since July 22. It reached a nine-month low of 2.28 percentage points on July 1 and a record high of 2.94 percentage points in February.
Month-End Buys
Treasuries also rose as investors purchased longer-term securities to increase the duration of their portfolios to match their benchmarks at the end of the month.
U.S. government debt extension increased by 0.06 years for Aug. 1, equal to the extension for July 1 and below 0.09 years for June 1, according to primary dealer Barclays Plc. Duration measures how sensitive a bond’s price is to changes in yield.
Treasuries briefly pared gains after data from the Institute for Supply Management-Chicago Inc. showed U.S. business activity expanded in July at a faster pace than projected, signaling manufacturing is driving growth. The measure rose to 62.3. Figures greater than 50 signal expansion.
The worst U.S. recession since the 1930s was even deeper than previously estimated, reflecting bigger slumps in consumer spending and housing, according to the Commerce Department’s annual revisions also issued today. The economy shrank 4.1 percent from the fourth quarter of 2007 to the second quarter of 2009, compared with the 3.7 percent drop previously on the books, the report showed.
Quantitative Easing
“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard wrote in a research paper yesterday about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”
Fed Chairman Ben S. Bernanke said last week the central bank is prepared to take further policy actions if the world’s largest economy “doesn’t continue to improve.” The Fed cut the benchmark interest rate to a record low range of zero to 0.25 percent in December 2008 and bought Treasury, housing-agency and mortgage-backed securities as the main tool of monetary policy.
A resumption of such purchases isn’t on the horizon, according to primary dealer Citigroup Inc.
“Further balance-sheet expansion is unlikely given the concerns around size of current balance sheet and the diminishing returns to further asset purchases,” Citigroup strategists led by Amitabh Arora in New York wrote in a report.
Assets on the Fed’s balance sheet totaled $2.33 trillion as of July 28, according to central bank data issued yesterday.
Nomura Holdings Inc., a primary dealer, expects policy makers to “ease” at their meeting in August. Economists led by David Resler in New York said the Fed may “change the language of the statement to signal that the balance sheet will remain expanded and change policy around the MBS program to start reinvesting pay-downs.”
Futures on the CME Group Inc. exchange show traders cut the probability policy makers will raise the benchmark interest rate by April to 31 percent, from 54 percent a month ago.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
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