Treasuries advanced after U.S. retail sales declined in May for a second straight month, renewing concern consumer spending is weakening as economic growth slows.
U.S. government securities fell earlier as the U.S. prepares to sell $21 billion of 10-year notes today and $13 billion of 30-year long bonds tomorrow. They erased losses on speculation the Federal Reserve, which meets next week, may move to spur growth.
“It was a very weak retail-sales number,” said Justin Lederer, an interest-rate strategist in New York at Cantor Fitzgerald LP, one of 21 primary dealers that trade with the central bank. “It makes the case for more stimulus. Everything is on the table.”
The yield on the benchmark 10-year note slipped one basis point, or 0.01 percentage point, to 1.65 percent at 11:35 a.m. in New York, according to Bloomberg Bond Trader data prices. Earlier it rose three basis points to 1.70 percent and fell as much as four basis points. The price of the 1.75 percent securities due in May 2022 rose 3/32, or 94 cents per $1,000 face amount, to 100 7/8.
Thirty-year bond yields were little changed at 2.77 percent after rising earlier to 2.82 percent.
Treasuries pared gains as U.S. stocks erased losses. The Standard & Poor’s 500 Index was little changed after losing as much as 0.7 percent and rising 0.2 percent.
“The dominating theme is the auction supply today,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “I don’t think there’s real demand here.”
The 10-year notes to be sold today yielded 1.65 percent in pre-auction trading, compared with a record low 1.855 percent at the previous offering on May 9. Investors submitted bids for 2.9 times the amount offered at that offering, versus an average of 3.08 times at the past 10 sales.
An auction yesterday of $32 billion of three-year notes drew a yield of 0.387 percent, compared with a forecast of 0.383 percent in a Bloomberg News survey of primary dealers, which are obligated to bid at U.S. debt sales. The bid-to-cover ratio fell to 3.53, from 3.65 at the previous sale on May 8.
Treasuries reversed losses after data showed retail sales in the U.S. fell as slower employment and subdued wage gains damped demand. The 0.2 percent decrease followed a similar decline in April that was previously reported as a gain, Commerce Department figures showed today in Washington. Sales excluding automobiles slumped by the most in two years.
“We’re clearly in a downswing in inflation,” said Thomas Simons, a government debt economist in New York at the primary dealer Jefferies Group Inc. “There’s very little sign of strength.”
The difference in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the securities, touched 2.11 percentage points, compared with the 2012 high of 2.45 percentage points in March. The average over the past 10 years is 2.15 percentage points.
A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.6 percent on June 8, down from a 2012 high of 2.78 percent on March 19 and a five-year average of 2.8 percent.
The U.S. central bank, which meets June 19-20, purchased $4.76 billion of Treasuries today due from August 2020 to February 2022 under its program known as Operation Twist. It is seeking to replace $400 billion of shorter-term securities in its holdings with longer-term bonds through this month to keep borrowing costs down.
The Fed bought $2.3 trillion of bonds from December 2008 to June 2011 in two rounds of a tactic called quantitative easing, seeking to cap borrowing costs and stimulate the economy.
Fed Chairman Ben S. Bernanke said June 7 the central bank remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate. Bernanke told the Joint Economic Committee in Washington the Fed has the tools that would provide more support to the economy.
U.S. government securities have lost 0.5 percent in June, paring their returns for the year to 1.6 percent, according to according to the Bank of America Merrill Lynch index.
A valuation measure showed 10-year U.S. government notes are at almost the most expensive levels ever. The term premium, a model created by economists at the Federal Reserve, was at negative 0.83 percent after reaching negative 0.94 percent, the record, on June 1. The average over the past year is negative 0.46 percent. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
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