Treasury Bonds End Slump as Factory Data Boost Demand

Treasury 30-year bonds snapped a four-day decline as a New York area factory gauge fell more than forecast, underscoring the Federal Reserve’s concern that more stimulus is needed to keep the economic recovery from slowing.

Benchmark 10-year notes halted last week’s drop as European governments remained divided on how to overcome the region’s debt crisis. Relative yields on mortgage securities slid to the lowest level on record after the Fed said Sept. 13 it would expand its holdings with monthly purchases of $40 billion of the debt in a third round of quantitative easing until the jobs market shows “sustained improvement.” Stocks fell.

“There’s plenty of uncertainty overseas, there’s plenty of uncertainty about whether this QE process will be able to do anything for the real economy anyway,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “You’ve got a little bit of risk-off with equities under pressure.”

The 30-year bond yield dropped five basis points, or 0.05 percentage point, to 3.04 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.75 percent security due in August 2042 climbed 31/32, or $9.69 per $1,000 face amount, to 94 13/32. The yield earlier rose to 3.12 percent, the highest level since May 4. It increased 26 basis points last week, the most since August 2009.

The 10-year yield declined two basis points to 1.84 percent after rising 20 basis points last week.

Market Volume

About $196 billion in Treasuries changed hands today as of 5:03 p.m. in New York through ICAP Plc, the world’s largest interdealer broker. Full-day volume reached $464 billion on Sept. 13, the most since August 2011, and averaged $262 billion over the past five years.

The Standard & Poor’s 500 Index declined 0.3 percent, and S&P’s GSCI Spot Index of 24 raw materials slid 2.2 percent.

A Bloomberg index of yields on Fannie Mae-guaranteed mortgage bonds trading closest to face value dropped about 10 basis points to 84 basis points higher than an average of five- and 10-year Treasury rates. It was the narrowest spread since at least 1984.

The U.S. central bank bought $4.7 billion of Treasuries today due from November 2020 to August 2020, according to the Fed Bank of New York’s website. It sold $7.8 billion of U.S. debt due from December 2014 to May 2015. The Fed is in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years in a program to put downward pressure on long-term interest rates.

The Federal Open Market Committee’s stimulus decision last week followed a European Central Bank announcement Sept. 6 that it will purchase euro-area debt to help curb the region’s sovereign-debt crisis, now in its third year.

Factory Gauge

The New York Fed’s general economic index dropped to minus 10.41 this month, the lowest since April 2009, from minus 5.85 in August. The median forecast in a Bloomberg News survey called for minus 2. Readings less than zero signal contraction in the gauge, known as the Empire State Index, which covers New York, northern New Jersey and southern Connecticut.

“The U.S. data continues to play to the Fed’s opinion that QE3 is warranted, as the economy is still very weak,” Adrian Miller, a fixed-income strategist at GMP Securities LLC in New York, said in a telephone interview. “And despite the ECB’s positive announcements of late, there are still many structural and political headwinds that face the European Union, all of which is keeping a bid in Treasuries.”

Treasury 10-year yields are little changed this year as reports signaled the economic recovery will be slow. A Bloomberg survey of economists projected the benchmark yields will decline to 1.8 percent by year-end. The most recent projections in the poll are given the heaviest weightings.

Treasury Returns

U.S. government securities lost 0.6 percent over the past month as of Sept. 14, Bank of America Merrill Lynch indexes showed. The Standard & Poor’s 500 Index gained 4.6 percent, including reinvested dividends.

Thirty-year bond yields fell today after a technical indicator signaled they may have risen too far, too fast. The 14-day relative strength indicator for the bond rose to 75 on Sept. 14 before slipping to 69 today. A level above 70 suggests yields may change direction.

The long-bond yield closed Sept. 14 above its 200-day moving average, 2.94 percent, for the first time since April.

European Union finance ministers meeting in Cyprus last week were deadlocked over the timetable for a more unified EU banking sector, with a German-led coalition pushing back against a more ambitious plan sought by France, Spain and Italy. The ministers also disagreed over the terms of bailout requests and the role of the ECB.

‘Some Steam’

“The European situation is still giving some steam to the Treasury market, as there is still a lot of uncertainty,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed.

Gains by U.S. bonds were tempered as investors bet the Fed’s monetary policy will fuel inflation and boost demand for higher-yielding asset such as stocks.

The difference between yields on 10-year notes and comparable-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, reached the widest in six years today. The spread expanded as much as nine basis points to 2.73 percentage points, the most since May 2006

“TIPS have rallied quite a bit since the FOMC as the Fed is willing to let inflation heat up again to try to boost jobs and the economy,” Societe Generale’s Murphy said.

U.S. government securities traded at least expensive level in more than three weeks, according to the 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation. The gauge was at negative 0.81 percent, the least costly since Aug. 21. A negative reading shows investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.73 percent.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net

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

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