Treasuries halted a rally that sent five-year yields to a record low before a report that economists said may indicate U.S. industrial production expanded, a sign of growth after figures yesterday showed retail sales tumbled.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the U.S. economy is “approaching recession” in a Twitter post yesterday. Demand for the relative safety of U.S. securities pushed five-year yields to 0.577 percent, the least ever.
“The market is already discounting a weak U.S. economy,” said Kei Katayama, who buys U.S. debt in Tokyo at Daiwa SB Investments Ltd., which manages the equivalent of $63 billion and is a unit of Japan’s second-largest brokerage. “We need even weaker data for people to buy more. This market is too expensive.”
The benchmark 10-year note yielded 1.48 percent as of 7:16 a.m. in London, according to Bloomberg Bond Trader prices. The 1.75 percent security maturing in May 2022 was little changed at 102 1/2. Five-year notes yielded 0.59 percent.
Japan’s 10-year rate was unchanged at 0.77 percent today. It slid to 0.755 percent on July 13, a level not seen since 2003.
Output at U.S. factories, mines and utilities increased 0.3 percent in June after a 0.1 percent drop the prior month, based on a Bloomberg News survey of economists before the Federal Reserve report. Retail sales slid 0.5 percent last month, the government reported yesterday.
The economy is approaching a recession when measured by employment, retail sales, investment and corporate profits, Gross wrote on Twitter. His $263 billion Total Return Fund had 52 percent of its assets in mortgage-related bonds and 35 percent in Treasuries as of June 30, according to the Pimco website.
The cost of living in the U.S. was probably unchanged in June from May, Labor Department figures will show today, based on Bloomberg surveys. Prices rose 1.6 percent from a year earlier, according to economist estimates, which would be the smallest increase in 17 months. The figure would still be higher than the 10-year Treasury rate, resulting in a so-called real yield of negative 12 basis points.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt known as the breakeven rate, was 2.08 percentage points. The 10-year average is 2.15 percentage points.
The five-year, five-year forward break-even rate, a measure of inflation expectations that the Fed uses to guide monetary policy, was 2.4 percentage points as of July 12. The figure has dropped from 2012’s high of 2.78 percentage points set in March.
While the two gauges show expectations for price increases are waning, yields indicate there is still demand for the inflation insurance that TIPS provide.
Yields on 10-year TIPS fell to a record low of negative 0.68 percent yesterday. The U.S. is scheduled to sell $15 billion of the securities July 19. TIPS have returned 6.1 percent this year as of yesterday, versus 2.8 for conventional Treasuries, according to Bank of America Merrill Lynch indexes.
Net purchases of long-term notes, bonds and equities by investors outside the U.S. rose to $41.3 billion in May from $25.6 billion in April, based on responses from economists before the Treasury Department reports the figure today.
Separate data will show homebuilder sentiment climbed, according to the Bloomberg surveys.
Fed Chairman Ben S. Bernanke is scheduled to testify to lawmakers in Washington today amid speculation he will call for more economic stimulus. The Fed under Bernanke bought $2.3 trillion of Treasury and mortgage-related debt from 2008 to 2011 to stimulate the economy.
The central bank decided in June to extend a policy known as Operation Twist, where it sells short-term securities and uses the proceeds to buy longer-term debt, to $667 billion from $400 billion.
Inflation probably isn’t slowing enough to lead the Fed to increase its so-called quantitative easing policy of bond purchases, said Toby Nangle, head of multi-asset allocation at Threadneedle Investments in London.
“You need to have breakeven inflation expectations in the States to fall further,” Nangle said yesterday on Bloomberg Television’s “The Pulse” with Maryam Nemazee. “You typically don’t get more QE without inflation expectations falling below 2 percent. We’re not quite there yet.” Threadneedle manages the equivalent of $113.5 billion, according to its website.
Ten-year yields will rise to 1.92 percent by year-end, according to a Bloomberg survey of economists, with the most recent projections given the heaviest weightings.
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