Treasuries Gain the Most in a Month Since August as Economic Growth Cools
Treasuries had their biggest monthly return since August as cooling economic growth and the Federal Reserve’s commitment to sustain monetary stimulus spurred demand for the safety of government debt.
Two-year note yields had the biggest monthly drop since January 2010 as business in the U.S. grew less than forecast and consumer-spending growth slowed. Ten- and 30-year debt rose today amid month-end buying. Fed Chairman Ben S. Bernanke said this week the central bank will finish buying $600 billion of debt in June, as planned, while holding interest rates at almost zero, where they’ve been since December 2008.
“There were some expectations embedded in the psychology of the marketplace expecting a little more hawkish of a tone” from the Fed, said Russ Certo, a managing director and co-head of rates trading at Gleacher & Co. in New York. “Bernanke simply didn’t meet those expectations, and the market has traded better as a result.”
Yields on two-year notes fell two basis points, or 0.02 percentage point, to 0.61 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 0.60 percent, the lowest level since March 21, after earlier rising as much as two basis points. The price of the 0.625 percent security due in April 2013 increased 1/32, or 31 cents per $1,000 face amount, to 100 1/32.
Two-year yields dropped 22 basis points this month, the most since a decrease of 32 basis points in January 2010. The fell five basis points for the week.
Ten-Year Yields
Ten-year yields declined two basis points to 3.29 percent and touched 3.28 percent, the least since March 23. They fell 18 basis points in April in the first monthly drop since sliding 44 basis points in August, and slid 10 basis points this week. Thirty-year yields lost two basis points to 4.40 percent.
Treasuries gained as some investors purchased longer-term debt to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays U.S. Treasury Index. Duration measures how sensitive a bond’s price is to changes in yield.
“We are seeing some month-end extension buying and the continuation of the benefits from Bernanke’s dovish tone helping support the market,” Gleacher’s Certo said.
The Barclays index is expected to extend by 0.08 year at the end of April, the same as for March, according to the firm, one of 20 primary dealers that trade with the Fed.
Treasuries have returned 1 percent this month, the most since August, according to the Bank of America Merrill Lynch Treasury Master index. The Standard & Poor’s 500 Index has returned 2.6 percent during the period.
Business Barometer
The Institute for Supply Management-Chicago Inc. said today its business barometer fell to 67.6 this month, from 70.6 in March. The median forecast in a Bloomberg News survey of economists called for a decline to 68.2. Figures greater than 50 signal expansion.
Government bonds rose yesterday as Commerce Department data showed U.S. economic growth slowed to a 1.8 percent annual pace in the first quarter from a 3.1 percent pace in the fourth.
Personal spending rose 0.6 percent after a revised 0.9 percent gain the prior month that was higher than previously estimated, Commerce Department figures showed today. The data also showed inflation has picked up from a year ago. The measure tied to spending patterns increased 1.8 percent from March 2010, following a 1.6 percent gain in the 12 months ended in February.
Measure of Expectations
A bond market measure of inflation expectations the Fed uses to help determine monetary policy was at 2.96 percentage points, compared with a 2011 low of 2.77 percentage points on Feb. 16 and a three-month high of 3.13 percentage points on April 15. The five-year forward break-even rate projects what the pace of consumer price increases may be beginning in 2016. It averaged 2.78 percentage points over the past five years.
“The market is battling the notion that there are inflationary risks in the system with the reality that growth has been slower than even the Fed thought it would be,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It doesn’t mean inflation risks are off the table, but slower growth is an offset.”
Bernanke indicated during a press conference on April 27 the Fed will maintain record monetary stimulus once large-scale bond purchases end in June, while the need to cap inflation means further easing is unlikely. He wouldn’t predict when stimulus would end.
The central bank said in November it would buy Treasuries through the middle of 2011 to spur economic growth. It purchased $6.68 billion of U.S. debt today due from November 2013 to March 2015 as part of the plan. The acquisition amounted to 22.5 percent of the $29.6 billion in securities submitted by dealers. The average at the Fed’s past 10 purchases was 26.5 percent.
Rate Wagers
The likelihood policy makers will raise the target rate for overnight lending between banks at their March 2012 meeting decreased to 44 percent, from 61 percent a month ago, Fed funds futures showed. The benchmark is zero to 0.25 percent.
President Barack Obama has offered the outlines of a program to reduce the debt by $4 trillion over 12 years through a combination of spending cuts and tax increases.
The pace of U.S. industrial production may cool temporarily as some factories work to replace supplies of parts interrupted after the March 11 earthquake and tsunami in Japan. Production rose 0.8 percent in March, according to a Fed report April 15.
To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
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