Ten-year notes rose for the third time in four days as a orders to manufacturers unexpectedly dropped in September and households were more glum in October for a third consecutive month, showing the U.S. economy was taking a step back heading into the fiscal gridlock that partially shut down the federal government. The 16-day closure ended when lawmakers agreed to open the government until Jan. 15 and suspend the debt ceiling to Feb. 7. The extra yield investors get from corporate bonds instead of Treasuries shrank to the least since June.
“You had weaker payrolls and durable goods this week,” said Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, one of the 21 primary dealers that trade with the Fed. “The market’s pricing in a later Fed hike, a slower hiking cycle and a later start to tapering.”
The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.51 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2.5 percent note due August 2023 rose 3/32, or 94 per $1,000 face amount, to 99 29/32. The yield has fallen seven basis points this week.
Treasuries returned 0.6 percent in October through yesterday, limiting its 2013 loss to 1.85 percent, data compiled by Bloomberg show. Securities in the corporate bond index returned 1.4 percent this month, trimming losses to 1.06 percent for the year. The Bloomberg Global Developed Sovereign Bond Index (BGSV) gained 1.48 percent this month, limiting its 2013 decline to 1.89 percent.
The seven-day relative strength index for the Treasury 10-year note yield was at 30 today, dropping from 31.48 yesterday, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.
The Treasury will sell $96 billion of debt next week, starting with $32 billion of two-year notes on Oct. 28, $35 billion of five-year securities on Oct. 29 and $29 billion of seven-year obligations on Oct. 30. It will be the third consecutive month that the U.S. has reduced the offering size of two-year debt.
Demand may come from “people who have been light on Treasuries or underinvested, and believe the environment is better to become more involved,” said Christopher Sullivan, who oversees $2.2 billion as chief investment officer at United Nations Federal Credit Union in New York.
The Fed will maintain monthly bond purchases at $85 billion until March, according to a Bloomberg News survey of economists. Before the partial government shutdown, the majority predicted the central bank would taper stimulus this year. The next two Fed meetings are Oct. 29-30 and Dec. 17-18.
The shutdown that began Oct. 1 probably trimmed 0.25 percentage point from fourth-quarter economic growth and cost 120,000 jobs in October, President Barack Obama’s chief economic adviser said Oct. 22. Payrolls climbed by 148,000 in September, the Labor Department said Oct. 22, less than the forecast of 180,000 in a Bloomberg survey.
“There’s nothing here that would alter our view that as a result of the crises that we’ve been through the economic growth that we’ve been experiencing will be tamped down a little bit,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “We’re likely to see numbers that are weaker as a result of the crises.”
The Thomson Reuters/University of Michigan final index of consumer sentiment showed declined to 73.2 from 75.2 a month earlier. A Bloomberg survey projected a decline to 75.
Bookings for non-military capital goods excluding aircraft, which reflect demand for productivity-enhancing equipment like machinery and electrical gear, decreased 1.1 percent last month, the second drop in three months, the Commerce Department said.
Traders are pricing in a 26.7 percent probability that the Fed will raise its benchmark overnight rate by its January 2015 meeting, down from 37.1 percent a month ago.
Securities in the Bloomberg USD Corporate Bond Index have an average yield of 3.10 percent, versus 1.37 percent for the Bloomberg U.S. Treasury Bond Index. The difference of 1.73 percentage points was the narrowest since June 3.
Volatility in Treasuries (BUSY) as measured by the Merrill Lynch MOVE Index climbed to 63.14 yesterday after dropping to 62.05 on Oct. 23, the lowest level since May 21. The average for the past decade is 95.
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