Treasuries snapped their longest losing streak in two months on speculation the economy may be slowing after reports showed manufacturing in the New York region shrank this month and producer prices dropped the most in three years in April.
The rally pulled yields on 10-year notes down from the highest in two months, and followed four straight days of declines in the price of the debt, which serves as a benchmark for everything from corporate borrowing costs to mortgages. The slump was the longest since it fell for six trading days ending March 11.
“We got numbers that suggest the economy is not on as strong a footing as we thought,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “Inflation is really not a big deal.”
U.S. 10-year yields dropped four basis points, or 0.04 percentage point, to 1.94 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent security due in May 2023 gained 11/32, or $3.44 per $1,000 face amount, to 98 10/32. Earlier yields climbed to 1.98 percent, the highest level since March 15.
Thirty-year bond yields declined four basis points to 3.16 percent, after touching a seven-week high yesterday. The Standard & Poor’s 500 Index of stocks added 0.5 percent, after reaching an all-time high.
The 14-day relative strength index for the 10-year note reached 70.1. A value above 70 indicates the yield may be poised to change direction. It was at 53 a week earlier.
Trading volume closed at $414.9 billion after reaching $451 billion on May 10, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume for this year is $283 billion.
Bank of America Merrill Lynch’s MOVE index measuring price swings in Treasuries rose to 58.28 basis points, the highest level since March 27. It dropped May 9 to an all-time low of 48.87 basis points. The measure averaged 62.6 basis points during the past 12 months.
The Federal Reserve Bank of New York’s general economic index declined to minus 1.4 in May from 3.1 in April. Readings less than zero signal contraction in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey called for an increase to 4.
Output at factories, mines and utilities fell a more-than-forecast 0.5 percent after a revised 0.3 percent gain in the prior month that was weaker than previously reported, a report from the Fed showed today in Washington. The median forecast in a Bloomberg survey called for a 0.2 percent decline. Manufacturing, which makes up 75 percent of total production, decreased 0.4 percent, the third drop in the last four months.
“Data reminds the market that the path to a recovery will be a choppy one,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It brings into question the idea we would see 2 percent 10-year yields this week.”
The producer price index dropped by 0.7 percent last month, the biggest decrease since February 2010. It was forecast to drop 0.6 percent in April, according to a Bloomberg News survey before the report.
The yield gap between 10-year notes and Treasury Inflation Protected Securities, called the 10-year break-even rate, was at 2.29 percentage points, close to the 2013 low of 2.24 percentage points reached on May 9. It is down from this year’s high of 2.6 percentage points reached Feb. 4.
Central banks around the world have been buying bonds and cutting interest rates in a bid to boost growth and stave off the risk of deflation.
The Fed said after a policy meeting on May 1 it will keep buying bonds as long as the outlook for inflation doesn’t exceed 2.5 percent and as unemployment remains above 6.5 percent.
The central bank is buying $85 billion of government and mortgage debt a month to support the economy by holding borrowing costs down. The Fed bought $916 million in notes maturing between August 2023 and February 2031 today. Fed policy makers meet on June 18-19.
Foreign holdings of Treasuries rose to $5.76 trillion in March, a 0.7 percent increase from the previous month, the smallest since December. Foreign investors held 50.5 percent of the $11.4 trillion in U.S. debt outstanding in March, the smallest since December.
China, the largest foreign lender to the U.S., decreased its holdings in Treasuries in March by $1.4 billion or 0.1 percent to $1.25 trillion. Japan, the second largest foreign lender to the U.S., reduced its holdings of U.S. government debt $0.5 billion to $1.105 trillion.
The Treasury is revising holdings data on a monthly basis rather than annually based on the nationality of the beneficial holder of the debt, while the initial data will still count the location of the purchase.
Treasuries have dropped 1.1 percent this month as of yesterday, according to Bank of America Merrill Lynch indexes. The debt has lost 0.3 percent this year after gaining 2.2 percent in 2012.
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