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U.S. Five-Year Notes Head for Monthly Gain Before Economic-Growth Report
U.S. five-year notes led the Treasury market toward a monthly gain before a Commerce Department report that analysts said will show U.S. economic growth slowed in the second quarter.
Debt due in 2015 emerged as a favorite because its shorter maturity offers safety as the U.S. economy struggles to regain momentum, while it yields more than two-year notes. Ten- and 30- year bonds lagged behind on concern the government will increase long-term borrowings to sustain the expansion.
“People need to fill their portfolios with very safe assets,” said Satoshi Okumoto, who helps oversee the equivalent of $66 billion in assets as a general manager at Fukoku Mutual Life Insurance Co. in Tokyo. “They are not confident in the economy.” Fukoku bought Treasuries this month, he said.
The five-year note yielded 1.66 percent as of 6:59 a.m. in London, after dropping to a 16-month low of 1.62 percent on July 21. The 1.75 percent security due in July 2015 traded at a price of 100 14/32, according to BGCantor Market Data.
Two-year rates were 0.57 percent, versus the record low of 0.5516 on July 23.
U.S. economic growth slowed to 2.6 percent in the second quarter from 2.7 percent in the first, according to the median forecast in a Bloomberg News survey of 81 economists before the Commerce Department reports the figure. Ford Motor Co., the second-largest U.S. automaker, said last week that earnings will fall in the second half as consumers focus on paying off debt.
Monthly Returns
Five-year Treasuries returned 0.8 percent in July, while two-year notes gained 0.1 percent, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. The difference between yields on the two securities narrowed to 1.08 percentage points, the least since April 2009.
Yusuke Tanaka, the senior dealer in Singapore at Mitsubishi UFJ Financial Group Inc., a unit of Japan’s largest publicly traded bank, said he’s borrowing in the short-term market and is using the funds to buy five-year notes.
The yield on five-year securities is about 1.52 percentage points more than the overnight rate of 0.14 percent, with the spread narrowing from this year’s high of 2.68 percentage points in January. Tanaka said he’s avoiding longer maturities because of their volatility.
The broad Treasury market returned 0.2 percent in July, the Bank of America figures show. By contrast, the MSCI World index of shares gained 8.3 percent including reinvested dividends.
Shorter maturities, those that tend to track the Federal Reserve’s target for overnight bank lending, rallied as traders bet the central bank will delay any increases in borrowing costs.
Futures Bets
Futures on the CME Group Inc. exchange show traders have reduced the chance that policy makers will raise their target by April to 39 percent from 54 percent a month ago.
Fed Bank of St. Louis President James Bullard, who votes on rates this year, said the central bank should resume purchases of Treasury securities if the economy slows and prices fall.
“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, in a research paper yesterday about the possibility of deflation. Japan has been struggling to keep prices in its economy from falling for most of the past decade.
The U.S. central bank cut the benchmark interest rate almost to zero in December 2008 and turned to purchases of Treasury, housing-agency and mortgage-backed securities as the main tool for monetary policy.
TIPs
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has narrowed to 1.78 percentage points from this year’s high of 2.49 percentage points in January. The five- year average is 2.13 percentage points.
Treasury 10-year yields below 3 percent are “unsustainable,” Morgan Stanley said in a note yesterday.
“The surprise may be a rebound in the data,” wrote Jim Caron, head of global interest rate strategy for the company in New York.
Economic growth may quicken past 3 percent in the third quarter, sending 10-year yields to 3.25 percent over the next four to six weeks, the report said. Morgan Stanley is one of the 18 primary dealers required to bid at the government debt sales.
A Bloomberg survey of banks and securities companies projects the 10-year yield will rise to 3.28 by year-end, with the most recent forecasts given the heaviest weightings.
Ten-year debt handed investors a 0.2 percent loss this month, and 30-year bonds tumbled 2.6 percent. The difference between 10- and 30-year yields widened to 1.10 percentage points yesterday, the most in 17 years.
President Barack Obama has increased the U.S. marketable debt to a record $8.1 trillion as he tries to sustain the nation’s economic expansion.
The U.S. Treasury will issue $399 billion of securities this quarter, compared with a net sales of $343.6 billion from April through June, a survey by the Securities Industry and Financial Markets Association in New York showed.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
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