Treasuries rose for the first time in six days as a collapse in China’s export growth added to signs the global economy is weakening and pushed investors toward safer assets.
Treasuries were poised for a third weekly decline, with the 10-year note yield reaching the highest since May 30. Benchmark 10-year yields climbed above the rate of inflation yesterday, luring investors seeking so-called positive real yields. China’s exports increased 1 percent in July from the year before, versus 11.3 percent in June, while French industrial output stagnated, reports today showed. The U.S. government’s budget deficit narrowed more than forecast in July.
“The main concern is the data out of China,” said Michael Pond, co-head of interest-rate strategy in New York at Barclays Plc, one of 21 primary dealers that trade with the Federal Reserve. “Risk assets have come under pressure overnight and hence investors are pushing into Treasuries.”
The benchmark 10-year yield dropped three basis points, or 0.03 percentage point, to 1.66 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 rose 9/32, or $2.81 per $1,000 face amount, to 99 22/32. The yield has increased nine basis points this week.
The 10-year yield climbed as high as 1.73 percent yesterday, surpassing the 1.7 percent level of U.S. consumer- price increases.
U.S. consumer-price inflation slowed to 1.5 percent in July from a year earlier, versus June’s 1.7 percent reading, according to a Bloomberg survey before the Labor Department report on Aug. 15. The figure would translate into a real yield of 15 basis points, based on today’s 10-year rate. It was negative 2.11 percentage points in October.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices during the life of the debt, was 2.27 percentage points. The average during the past decade is 2.16 percentage points.
Corporate bonds outperformed government debt as investors sought higher yields.
U.S. government securities have returned 1.9 percent this year as of yesterday, versus 7.7 percent for an index of investment-grade and high-yield company debt, according to Bank of America Merrill Lynch data. The MSCI All-Country World Index (MXWD) of stocks handed investors a 10 percent gain including reinvested dividends, according to data compiled by Bloomberg.
“The market’s anticipating there’s going to be some sort of accommodation from the Fed,” said Aaron Kohli, an interest- rate strategist BNP Paribas SA in New York, a primary dealer. “Equities have done extremely well, corporate credit is doing extremely well. Almost all sectors of the market are just roaring.”
The 10-year yield may extend declines to test its 55-day moving average of 1.57 percent, according to Commerzbank AG.
“It is even possible that the 1.44 percent current August low and the 1.435 percent June trough are to be revisited before the yield rises in earnest,” technical analysts including Karen Jones at Commerzbank in London, wrote in a note.
The economy added 163,000 jobs in July, a government report showed Aug. 3, more than the 100,000 projected by economists. Initial claims for unemployment insurance unexpectedly dropped by 6,000 to 361,000 last week, a report showed yesterday.
Retail sales rose 0.3 percent in July snapping a three- month string of declines, the Commerce Department in Washington is expected to say Aug. 14, according to the median forecast of 45 economists in a Bloomberg News survey. The three months of declines is the longest such streak since the period from July through December of 2008.
Demand waned at sales of three-, 10- and 30-year Treasuries this week. The 10-year auction on Aug. 8 drew bids for 2.49 times the amount of debt available, dropping from 3.61 at the prior sale on July 11.
“The auctions are going to be choppier and choppier all the time, because the lower yields go, the less interest people are going to have in them,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $28 billion. “Really nothing’s changed to warrant higher rates.”
The U.S. government’s budget deficit narrowed as spending dropped by 11.9 percent from a year earlier and some payments were accelerated to the previous month for calendar-related reasons.
The gap shrank 46 percent to $69.6 billion from a $129.4 billion shortfall in July 2011, the Treasury Department said today in Washington. Last month’s gap was smaller than the projected $90 billion deficit, according to the median estimate in a Bloomberg News survey. For the first 10 months of this fiscal year the deficit was 11.5 percent narrower than in the year-earlier period.
The deficit through July for the 2012 fiscal year, which ends Sept. 30, is $973.8 billion compared with $1.1 trillion at this point last year and the lowest for July since 2008.
The Fed sold $7.8 billion of notes due from July 2013 to January 2014 today, according to the website of its New York branch. The sales are part of the central bank’s effort to support the economy by swapping shorter-term Treasuries in its holdings for longer-maturity ones to cap long-term borrowing costs.
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