Treasuries Rise as Slower GDP Growth Eases Fed-Tapering Concern
Treasuries gained, pushing 10-year yields down the most in almost two weeks, as data showed the U.S. economy grew less than previously estimated, easing concern the Federal Reserve is moving closer to slowing its bond buying.
Ten-year notes rose for the first time in eight days, ending the longest stretch of declines since March 2012. Richmond Fed Bank President Jeffrey Lacker said he expects the U.S. expansion to remain “sluggish.” Fed Chairman Ben S. Bernanke said last week policy makers may slow stimulus this year if the economy grows in line with their projections.
“We are still in a low-growth environment,” said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management in Milwaukee. “The selloff in rates was fast, and we are seeing some retracement. Rates should stay near these levels until we get closer to the Fed actually intervening. And that will depend on the economy.”
The benchmark 10-year yield dropped seven basis points, or 0.07 percentage point, to 2.54 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. It was the most on a closing basis since June 13. The yield slid earlier as much as 10 basis points to 2.51 percent after touching 2.66 percent on June 24, the highest level since August 2011.
The price of the 1.75 percent security due in May 2023 gained 19/32, or $5.94 per $1,000 face amount, to 93 5/32.
The current five-year note yield decreased seven basis points to 1.42 percent after climbing to 1.56 percent on June 24, the highest since July 2011.
A technical gauge signaled that the increase in Treasury 10-year yields may have been too rapid. The 14-day relative-strength index climbed yesterday to 79.8 and was at 72.1 today. A level above 70 shows yields may be set to change direction.
“Any time there is data suggesting that the selloff is overdone after the extent of the weakness we have seen, you will see some giveback,” said Adrian Miller, New York-based director of fixed-income strategies at GMP Securities LLC. “There is still a question if we are getting to enough to propel the economy forward.”
Treasuries climbed after the Commerce Department reported U.S. gross domestic product expanded at a revised 1.8 percent annualized rate from January through March, down from a prior estimate of 2.4 percent.
The Fed has been buying $85 billion of U.S. government debt and mortgage securities every month to put downward pressure on borrowing costs in the third round of buying under its quantitative-easing stimulus strategy. The asset-purchase programs, which began in 2008, have lifted the central bank’s assets to $3.5 trillion from below $1 trillion five years ago.
Bernanke, speaking on June 19 after a two-day meeting of the Federal Open Market Committee, said tapering the purchases would depend on economic growth in line with the Fed’s estimates. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent next year.
Lacker said he sees growth of about 2.25 percent next year. The central bank isn’t close to reducing its bond holdings, he said in a Bloomberg Television interview with Peter Cook.
“The economy is telling us this is about all we’re capable of right now,” Lacker, who doesn’t vote on the FOMC this year, said. “We’re going to continue to get growth at a fairly disappointing rate going forward.”
Lacker, who dissented in September 2012 against the announcement of a third round of bond purchases by the Fed, said he would be “fine with us tapering it off right now.”
Treasuries remained higher after the U.S. auctioned $35 billion of five-year securities to the lowest demand in almost four years. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.45 percent, the least since September 2009. The average for the previous 10 auctions was 2.84.
The offering drew a yield of 1.484 percent, the highest since July 2011, compared with a forecast of 1.472 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers. The yield was 0.71 percent at the April sale.
“Overall the auction was fair, but interest is not amazing for Treasuries right now,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, which as a primary dealer is obliged to bid in U.S. debt sales. “There is still concern, uncertainty and volatility.”
Indirect bidders, an investor class that includes foreign central banks, purchased 53 percent of the notes, the most since January 2010. That compared with an average of 41.7 percent at the past 10 sales.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 3.6 percent of the securities, the lowest level since November 2009, versus 23.3 percent at the May offering. The average at the past 10 auctions was 16.9 percent.
The government will auction $29 billion of seven-year debt tomorrow. It sold $35 billion of two-year notes yesterday.
Treasuries have lost 2 percent this month and 3 percent this year, according to the Bloomberg U.S. Treasury Bond Index.
The 10-year real yield, the difference between the benchmark U.S. note yield and the annual inflation rate, narrowed to 1.17 percentage points today after widening to 1.25 percentage points yesterday, the most since March 2011. It averaged 1.13 over the past decade.
The yield gap between 10-year notes and Treasury Inflation Protected Securities, a measure of trader expectations for inflation over the life of the debt called the break-even rate, was 1.95 percentage points after shrinking to 1.81 percentage points on June 24, the narrowest since October 2011. The average over the past year is 2.38 percentage points.
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