U.S. debt briefly pared gains earlier after a report showed the U.S. economy expanded at a faster-than-forecast 2 percent annual rate in the third quarter. The Commerce Department report also showed slower core inflation, producing positive real 10- year note yields for the first time since 2011. The Federal Reserve purchased $1.77 billion of longer-term securities as part of its Operation Twist program to boost economic growth, according to the Fed Bank of New York’s website.
“There’s still a flight-to-quality bid being generated by concern for Europe,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s a roller-coaster ride.”
The benchmark 10-year yield dropped eight basis points, or 0.08 percentage point, to 1.75 percent at 5:10 p.m. in New York after rising to 1.85 percent yesterday, the highest level since Sept. 17, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 climbed 22/32, or $6.88 per $1,000 face amount, to 98 29/32.
The yield on the 10-year Treasury note was greater than the pace of core consumer price increase during the third quarter for the first time since December as yields exceed consumer gains by 45 basis points.
Inflation measured by the personal consumption expenditures index, a gauge preferred by Fed, rose 1.3 percent in the third quarter from a year earlier, less than the central bank’s goal of 2 percent, according to data from the Commerce Department today in Washington.
Negative real yields were in place during the second quarter when the PCE figure of 1.7 percent exceeded the yield on the 10-year note of 1.65 percent by five basis points. At the end of the first quarter, both leveled at 2.2 percent after inflation picked up. The 10-year note had exceeded inflation by almost 60 basis points at the end of the fourth quarter 2011.
Another Fed-preferred measure of inflation expectations, the five-year, five-year forward break-even rate was 2.84 percent on Oct. 23, after rising to 2.88 percent last month, the most since August 2011. The gauge projects the expected pace of consumer price increases over the five-year period beginning 2017.
The U.S. expansion has been strong enough to lead investors to favor corporate bonds over government securities as they seek higher yields.
Treasuries have returned 1.4 percent this year, according to Bank of America Merrill Lynch data. Bonds in an index of investment-grade and high-yield corporate securities gained 10 percent, the figures show.
The central bank said on Oct. 24 it will maintain its $40 billion in monthly purchases of mortgage-backed securities aimed to cap borrowing costs. “Economic activity has continued to expand at a moderate pace,” it said in a statement.
The Fed is also swapping short-term Treasuries in its holdings for longer-term securities to put downward pressure on borrowing costs. The central bank bought securities due from November 2022 to February 2031 today, according to the Fed Bank of New York’s website.
Overall gross domestic product, the value of all goods and services produced in the U.S., rose after climbing 1.3 percent in the second quarter, Commerce Department figures showed. The median forecast of 86 economists surveyed by Bloomberg called for a 1.8 percent gain.
“It’s a little bit better than expectations,” said Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 21 primary dealers that trade with the Fed. “Consumption was weaker than thought. It’s a mixed bag altogether.”
Employment and growth are central themes in the campaigns of President Barack Obama and Republican challenger Mitt Romney before the Nov. 6 elections. Today’s report will be the last reading on the economy before the vote. A report Nov. 2 is forecast to show the U.S. added 120,000 jobs, according to economists in a Bloomberg News survey. A separate report is forecast to show the unemployment rate rose to 7.9 percent, from 7.8 percent.
Spanish unemployment exceeded 25 percent in the third quarter as a deepening recession left one in four workers jobless, a government report showed today. Spain’s 10-year bond yields are set for the biggest weekly increase since August.
The benchmark yield will drop to 1.73 percent by year-end, according to a Bloomberg survey of economists with the most recent projections given the heaviest weightings. The rate will rise to 2.33 percent by the close of 2013, the responses show.
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