Treasuries gained for a third day in the longest winning streak in almost a month after reports showed euro-region output contracted and China’s manufacturing weakened, boosting the refuge appeal of government bonds.
The U.S. drew a record low negative yield at an auction of $13 billion of 10-year Treasury Inflation Protected Securities. Nominal 10-year notes briefly pared gains after initial claims for unemployment benefits dropped last week to a four-year low. Federal Reserve Chairman Ben S. Bernanke said low inflation gives the central bank flexibility on interest rates.
“People are comfortable with dipping back into Treasuries,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “Our economy is not just based on how we do internally. We are still tied in to the rest of the world. The weak economic news throughout the world brought in good buying.”
Yields on 10-year notes dropped two basis points, or 0.02 percentage point, to 2.28 percent at 5:09 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 2.24 percent, the lowest since March 14. The price of the 2 percent securities maturing in February 2022 increased 5/32, or $1.56 per $1,000 face amount, to 97 17/32.
Ten-year yields have climbed about 30 basis points this month. Thirty-year bond yields decreased two basis points today to 3.36 percent.
Volume declined to the lowest since March 12. About $259 billion of Treasuries changed hands through ICAP Plc, the world’s largest interdealer broker, as of 5:01 p.m., compared with $288 billion yesterday. The average daily volume over the past year is $268 billion.
Volatility dropped from the highest level this year. Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, fell to 87.1 basis points, after climbing March 20 to 93.3 basis points, the most since Dec. 29.
The TIPS auction drew a yield of negative 0.089 percent, the second 10-year inflation-note offering in a row at which it was less than zero. Investors still submitted offers for 2.81 times the amount being sold, exceeding the average bid-to-cover ratio of 2.74 at the past 10 auctions. Indirect bidders, a class of investors that includes foreign central banks, bought 40.4 percent of the notes, versus an average of 41.6 percent at the past 10 sales.
“TIPS offer real-return certainty,” said Chirag Mirani, strategist in New York at Barclays Plc, one of the 21 primary dealers that trade with the Fed. “Considering the longer-term U.S. fiscal situation, investors should want a greater real- return certainty compared with previous times.”
While buyers of TIPS are paid interest, the principal on the bonds rises with the consumer price index, a feature not found in the rest of the Treasury market.
The yield gap between nominal 10-year notes and comparable TIPS shrank for a second day. It fell to 2.38 percentage points after touching a seven-month high of 2.45 percentage points on March 20. The figure indicates the annual rise in consumer prices investors expect over the next decade. The average over the past year is 2.19 percentage points.
Determining the right time to raise interest rates is “challenging,” Bernanke said today in response to questions after a lecture at George Washington University in Washington. With low inflation, the Fed can keep rates at record low levels without fear of creating a wage-price spiral, he said.
A measure of traders’ inflation expectations that the central bank uses to help determine monetary policy rose on March 19 to 2.78 percent from its 2012 low of 2.37 percent reached March 5. The five-year, five-year forward break-even rate, which projects what the pace of price increases may be starting in 2017, was above the 10-year average of 2.76 percent.
Labor Department data showed initial jobless claims decreased to 348,000 in the week ended March 17, the fewest since February 2008, from a revised 353,000 the previous week.
Treasuries rose earlier as a preliminary index of China manufacturing from HSBC Holdings Plc and Markit Economics fell to 48.1 for March from 49.6 in the previous month. Readings below 50 indicate a contraction.
“Domestically, we’ve seen our data continue to improve,” said Larry Milstein, managing director in New York of government and agency debt trading at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. “I don’t think there’s any reason for us to break out of this range, 2.10 percent to 2.40 percent.”
The Treasury said it will auction $99 billion in notes next week: $35 billion of two-year securities on March 27, the same amount of five-year debt on the following day and $29 billion of seven-year notes on March 29. The amounts are the same as the last time the government sold the securities, in February.
The Fed bought $2.01 billion of Treasuries today due from August 2022 to May 2030 as part of its plan to replace $400 billion in shorter-term debt in its holdings with longer-term maturities by the end of June to boost the economy.
Treasuries rose earlier after London-based Markit Economics said in an initial estimate that a euro-area composite index based on a survey of purchasing managers in services and manufacturing dropped to 48.7 this month. A Bloomberg News poll forecast a gain to 49.6.
The MSCI World Index of stocks slid 0.6 percent, and the Standard & Poor’s 500 Index retreated 0.7 percent.
“There’s a resurgence of the risk-off trade,” said Thomas Simons, a government-debt economist in New York at the primary dealer Jefferies Group Inc.
While U.S. 10-year note yields climbed on March 20 to 2.40 percent, the highest level since Oct. 28, they’re still below the 3.87 percent average over the past decade. They will rise to 2.54 percent by year-end, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings.
Rates will have a hard time rising further than current levels because of expected fiscal tightening in the U.S., a lack of risk-free alternatives and the likelihood the Fed won’t change monetary policy soon given the uncertainty on economic growth, strategists at Barclays led by Larry Kantor, head of research in New York, said in a note to clients today.
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