U.S. 10-Year Yield Falls to 2011 Lows on Slower Economy, Index Purchases

Treasury 10-year note yields fell to the lowest this year as falling home prices, reduced consumer confidence and a weaker industrial reading added to concern the U.S. economy is slowing.

Longer-term Treasuries rose amid month-end buying as investors adjusted portfolios to match benchmarks. U.S. debt erased earlier declines sustained on optimism that euro-region policy makers will provide further support for Greece. Thirty- year bond yields fell as the Federal Reserve purchased $1.9 billion of Treasuries maturing from August 2029 to May 2040 as part of its $600 billion plan to boost the economy.

“The steady stream of softer data is confirmation that yields should be lower than previously thought,” said Dan Mulholland, a Treasury trader in New York at Royal Bank of Canada, one of 20 primary dealers that trade with the Fed.

Treasury 10-year yields fell one basis point to 3.06 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent note due in May 2021 rose 3/32, or $0.94 per $1,000 face amount, to 100 17/32. The yield touched 3.0388 percent, the lowest level this year.

Thirty-year bond yields fell two basis points to 4.22 percent. On May 18 they touched 4.2 percent, the least since Dec. 1.

Month-End Buying

Treasuries gained as some investors purchased 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.

The Barclays index is expected to extend by 0.11 years for the end of this month, compared with 0.08 years at the end of April, according to the firm, a primary dealer.

“A part of the rally is likely due to the extension,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc. “More of it is due to the weaker economic data we got this morning.”

U.S. government securities returned 1.46 percent in May after gaining 1.15 percent in April, Bank of America Merrill Lynch data show. The two-month advance is the most since they rallied 2.74 percent in July and August.

‘Consistently Weaker’

“When the data is consistently weaker than expected and there’s no one else to sell, and the Fed still has more buying to do, then yields get pressured lower,” said Christopher Bury, co-head of fixed-income rates at primary dealer Jefferies & Co. in New York.

The gains in Treasury returns come as traders curb bets for an increase in the Fed’s rate, with futures contracts indicating that the odds for a rise in borrowing costs by March have fallen to 25 percent from 44 percent a month ago.

U.S. 10-year yields climbed earlier after Jean-Claude Juncker, Luxembourg’s prime minister and head of the euro-area finance ministers’ group, said yesterday officials had ruled out a “total restructuring” of Greek debt and “will try to solve the Greek problem by the end of June.”

“There is the possibility that they could come to a resolution that doesn’t involve a default,” said Anthony Cronin, a Treasury trader at Societe Generale in New York, a primary dealer. “That’s taken away some of the flight to quality out of the market.”

Debt Deal

The U.S. House will vote today on a debt limit increase. The vote is designed to be symbolic, and Republican leaders plan to use the planned rejection of a $2.4 trillion increase to demonstrate that support for raising the debt cap without accompanying spending cuts has waned.

“The real fireworks will start later this summer,” Pond of Barclays said. “As we get closer to the Aug. 2 deadline, the market concern will grow.”

Treasury Secretary Timothy F. Geithner has said he has taken steps to prevent a federal default until Aug. 2, using accounting measures that involve two retirement funds.

Longer-term Treasuries rose earlier after confidence among U.S. consumers unexpectedly declined in May to a six-month low as Americans’ outlook for business conditions and the labor market soured.

The Conference Board’s index dropped to 60.8 from a revised 66 reading in April, figures from the New York-based private research group showed today. The median forecast of economists surveyed by Bloomberg News called for a rise to 66.6.

The Institute for Supply Management-Chicago Inc. said its May business barometer dropped to 56.6 from 67.6 in April. Readings higher than 50 signal expansion and this month’s gauge is the lowest since November 2009. Economists watch the Chicago index and other regional manufacturing reports for an early reading on the national outlook.

The S&P/Case-Shiller index of property values in 20 cities fell 3.6 percent from March 2010, the biggest year-over-year decline since November 2009, the group said today in New York. At 138.16, the gauge was the weakest since March 2003.

“Every single economic statistic is weaker than expected,” said Ray Remy, head of fixed income in New York at primary dealer Daiwa Capital Markets America Inc. “It’s ongoing and pushing Treasury prices higher.”

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net;

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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