Treasury 10-year note yields fell to the lowest level this year as a report showing reduced business activity in April reinforced speculation the Federal Reserve won’t scale back unprecedented monetary stimulus.
Treasuries headed for a third monthly gain amid speculation the Fed will affirm its commitment to bond purchases at a two- day meeting starting today. The benchmark 10-year note pared gains as Apple Inc. plans to sell $17 billion in bonds. Volatility reached a record low.
“There really are clear signs of the economy weakening,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 21 primary dealers that trade with the Fed. “There’s very little chance of them announcing any type of tapering” of monetary stimulus.
The benchmark 10-year yield was little changed at 1.67 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 traded at 102 30/32.
The yield fell as much as four basis points today, reaching the lowest level since Dec. 12. It has dropped 18 basis points this month, the most since June.
U.S. government securities returned 1.1 percent in April as of yesterday, according to Bank of America Merrill Lynch indexes. The S&P 500 (SPX) gained 1.7 percent including reinvested dividends, data compiled by Bloomberg show.
The U.S. will announce the size of three securities sales tomorrow. Bond dealers including Bank of America Corp., Morgan Stanley, Jefferies LLC, and HSBC Holdings Plc forecast that the Treasury will maintain the size of its offerings in May at $32 billion for three-year notes, $24 billion for 10-year debt and $16 billion for 30-year bonds.
The 10-year break-even rate, a measure of inflation expectations derived from the difference between yields on conventional U.S. debt and Treasury Inflation Protected Securities, was at 2.34 percentage points, down from a 2013 high of 2.6 percentage points on Feb. 4. It touched a 2013 low of 2.25 percentage points on April 18.
“Falling inflation has helped the Treasury rally,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “We appear to be very fixed in a mind numbing range between 1.65 and 1.85 percent on 10 year notes as we are dealing with weaker than expected economic data in the U.S. and a rate of growth that might be sinking below trend.”
The MNI Chicago Report’s business barometer fell to 49 in April, the lowest since September 2009, from 52.4 last month. The median forecast of 51 economists surveyed by Bloomberg was 52.5.
The difference between the yields on two-year and 10-year notes, called the yield curve, was 1.46 percentage points, approaching the 2013 low of 1.42 percentage points reached April 23, indicating the market is priced for slower economic growth..
Treasuries pared gains as Apple prepares to sell bonds.
“The market having to have to digest that supply weighs on some Treasuries,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. market. “The slow growth story is keeping us near these levels.”
As companies sell debt, they enter into so-called rate lock agreements, in which they bet on Treasury prices falling to guard against higher yields. Once the debt is sold, the bets are ended.
Fed (FDTR) purchases have held down both yields and volatility. Bank of America Merrill Lynch’s MOVE index measuring price swings set a record low of 49.24 basis points today. The average for the past year is 62.96 basis points.
The Fed purchased $5.1 billion of securities maturing between April 2017 and December 2017 today, according to the New York Fed’s website.
The central bank is buying $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs. It spent $2.3 trillion on Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of its policy known as quantitative easing.
Several Fed officials said the central bank should begin tapering its bond-buying program this year and stop it by year- end, minutes of their March 19-20 meeting showed.
U.S. employment and manufacturing expanded less in March than economists surveyed by Bloomberg News predicted, while retail sales and durable goods orders dropped. Gross domestic product expanded at a 2.5 percent annual rate in the first quarter, less than the 3 percent expansion forecast by economists in a Bloomberg survey.
“For now, there’s a really good tone to the Treasury market,” said Sean Murphy, a trader at Societe Generale SA in New York, a primary dealer. “All the talk of the Fed tapering has been pushed back to early next year --or later rather than sooner.”
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