Treasury Yields at Almost 6-Week Low as Investors Weigh Outlook

Treasury 10-year note yields (USGG10YR) hovered at almost a six-week low as investors weighed whether the U.S economic recovery is strong enough for the Federal Reserve to make more cuts to its debt-purchase program.

Yields climbed earlier before data this week forecast to show manufacturing increased in January. The Federal Open Market Committee has cut its monthly debt purchases to $75 billion from $85 billion this month and holds a policy meeting next week. A gauge of U.S. consumer confidence fell Jan. 17 following a weaker-than-forecast employment report a week earlier.

“Although the Fed is tapering, the economy is growing at such an anemic pace that it lessens the concern that the Fed is burning to raise interest rates and tighten any time soon,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “Investors should play the range until we meaningfully break through 3 percent.”

Ten-year note yields were little changed at 2.83 percent at 5 p.m. New York time, Bloomberg Bond Trader data show, the second day below their 50-day moving average. Yields increased earlier as much as five basis points, or 0.05 percentage point, to 2.87 percent after dropping to 2.816 percent on Jan. 17, the lowest level since Dec. 11.

The price of the benchmark 2.75 percent securities maturing in November 2023 declined 2/32, or 63 cents per $1,000 face amount, to 99 10/32.

U.S. financial markets were shut yesterday for Martin Luther King Jr. Day.

Bond Returns

U.S. government securities have returned 1 percent this month, set for the biggest gain since April after a 1.5 percent loss during the last two months of 2013, according to the Bloomberg U.S. Treasury Bond Index. (BUSY)

“Daily momentum is still bullish,” William O’Donnell, head U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, wrote in a client note, citing technical analysis. “A daily close below 2.80 percent in 10s is the signal I’ll be looking for to guide me to the lower rate range.”

The FOMC meets Jan. 28-29. The policy-setting committee reaffirmed its view at its meeting last month that the target for the federal funds rate that banks charge each other on overnight loans will stay at almost zero at least as long as the unemployment rate is more than 6.5 percent, especially if inflation stays below its 2 percent goal.

The Fed decided at the December meeting to reduce its monthly bond-buying by $10 billion. It will probably keep cutting the purchases by $10 billion at each FOMC meeting, economists forecast in a Bloomberg survey conducted Jan. 10.

Fed Purchase

The central bank bought $1.39 billion in Treasuries today due from May 2038 to February 2043 as part of the program.

Investors expect the Fed’s benchmark interest-rate target to remain between zero and 0.25 percent during the next year. There’s a 22 percent chance the federal funds rate, the central bank’s target for overnight loans between banks, will rise by January 2015, data compiled by Bloomberg based on futures contracts show.

The yield on benchmark 10-year Treasuries fell four basis points to 2.82 percent in the five days ended Jan. 17, completing a third weekly decline that was the longest streak since the period ended Sept. 27. The yield reached 3.05 percent on Jan. 2, the most since July 2011, after climbing 1.27 percentage points in 2013, the biggest increase in four years.

“Buying into these yield levels is not compelling with big fundamental change on the horizon and the FOMC meeting coming up,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed income assets. “A reduction in purchases is still baked into the cake, and we won’t have any big data between now and the FOMC meeting to change the market’s outlook.”

Economic Update

The Markit Economics preliminary index of U.S. manufacturing based on a survey of more than 600 American manufacturers rose to 55 this month from 54.4 in December, according to the median estimate of analysts surveyed by Bloomberg News before the figure is published on Jan. 23.

The National Association of Realtors is forecast to say on the same day sales of previously owned homes rose 0.6 percent last month following a 4.3 percent drop in November.

The Thomson Reuters/University of Michigan preliminary January index of consumer sentiment unexpectedly fell to 80.4 in January from 82.5 in December, data last week showed. The Labor Department reported Jan. 10 that nonfarm payrolls grew at the slowest pace in almost three years, adding 74,000 jobs, compared with a Bloomberg survey forecast for a gain of 197,000.

Treasury 10-year yields will climb to 3.40 percent by Dec. 31, according to the weighted average estimate of more than 60 forecasters surveyed by Bloomberg.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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