U.S. 10-Year Yields Drop to 3-Month Low as Manufacturing Slows

Treasuries rose, pushing 10-year note yields to the lowest in three months, after a private report showed U.S. manufacturing slowed more than forecast in January, adding to questions about the strength of the economic recovery.

Rates doubled on U.S. bills due March 6, after the Treasury said it may exhaust extraordinary measures to fund the government at the end of February. Treasuries traded at the most expensive level in two months, according to a gauge that measures value. The government said it will pay down the most debt next quarter since 2007 as the budget deficit narrows. Bonds reversed earlier losses.

“With the data we are getting, it’s not clear whether growth is sustainable or stable,” said George Goncalves, the head of interest-rate strategy in New York at Nomura Holdings Inc., one of the 21 primary dealers that trade with the Fed. “Things aren’t horrible, but they are not that good, either.”

The 10-year yield fell seven basis points, or 0.07 percentage point, to 2.58 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. It touched 2.57 percent, the lowest level since Nov. 1. It rose three basis points earlier. The price of the benchmark 2.75 percent security due in November 2023 gained 19/32, or $5.94 per $1,000 face amount, to 101 1/2.

Ten-year yields may be poised to increase, according to a technical indicator. Their 14-day relative-strength index declined to 29.5, below the 30 level that suggests they may have fallen too far, too fast and be set to reverse course. The yields were last below 30 in April.

Trading Volume

Treasury trading volume at ICAP, the largest interdealer broker of U.S. government debt, rose 1 percent to $391 billion today. It reached $494 billion on Jan. 29, the highest level since June 24. It has averaged $311 billion over the past year.

Thirty-year (USGG30YR) bond yields dropped seven basis points to 3.53 percent and touched 3.52 percent, the lowest level since July 5, after increasing three basis points earlier. They moved below the 200-day moving average for a second day, an indication they may decrease further. Long-bond yields’ 14-day relative-strength index declined to 26.7.

Rates on Treasury bills due March 6 jumped five basis points, the most on a closing basis since Oct. 15, to 0.10 percent, from 0.05 percent on Jan. 31. The rate touched 0.125 percent on Jan. 27, matching the highest since July.

Treasury Secretary Jacob J. Lew has said U.S. measures used to stay within the nation’s statutory debt limit will run out in late February. President Obama signed legislation last year to suspend the debt limit until Feb. 7 and end a 16-day partial government shutdown.

Treasury Paydown

The U.S. Treasury Department said that next quarter it plans to pay down $40 billion of debt, benefiting from higher budget revenue and anticipating narrowing fiscal deficits. That would be the biggest paydown since the second quarter of 2007.

The Bloomberg U.S. Treasury Bond Index (BUSY) gained 1.8 percent in January, the most since May 2012, as the Argentine peso led a decline in emerging currencies.

Treasuries were at the most expensive level since Dec. 3, based on closing prices, according to the term premium, a Columbia Management model that includes expectations for interest rates, growth and inflation. The gauge was at 0.35 percent. It reached 0.61 percent on Jan. 8, a less-expensive level, when the 10-year note yield touched 3.01 percent. A value of 0.50 percent to 0.75 percent is considered normal for a developed-market economy with slow inflation. The average over the past decade is 0.21 percent.

Manufacturing Report

U.S. government bonds reversed losses after the Institute for Supply Management’s manufacturing index fell to 51.3 in January, the lowest since May and below the most pessimistic forecast in a Bloomberg survey, from 56.5 in December. The median estimate of 85 economists polled by Bloomberg was 56, and the lowest was 54. Manufacturing accounts for about 12 percent of the economy. The Tempe, Arizona-based group’s gauge averaged 53.9 for all of 2013. Readings above 50 indicate expansion.

Bonds (USGG10YR) “are stronger in response to the disappointing ISM,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The degree of economic optimism coming into 2014 is probably not warranted.”

The U.S. added 185,000 jobs in January, versus 74,000 in December, economists surveyed by Bloomberg forecast before the Labor Department’s nonfarm payrolls report on Feb. 7. Ten-year yields dropped 11 basis points on Jan. 10, when data showed the December jobs gain fell short of the 197,000 increase economists projected.

The outlook for the U.S. labor market is strong enough that the Fed decided to taper purchases of Treasuries and mortgage securities to $65 billion from $75 billion this month, it said on Jan. 29, after cutting them in January from $85 billion. Central-bank policy makers next meet in March in Washington.

Fed Purchase

The central bank bought $1.25 billion in Treasuries today due from May 2038 to August 2043 as part of the program.

Janet Yellen was sworn in as chairman of the Fed’s Board of Governors, while her predecessor, Ben S. Bernanke, joined the Brookings Institution as a distinguished fellow in residence.

The announcements completed a leadership transition, with Yellen becoming top policy maker as the Fed tries to wean financial markets off the bond-purchase program, which has pushed up central-bank assets to $4.1 trillion. She is scheduled next week to report on monetary policy in semi-annual testimony before the House and Senate.

To contact the reporter on this story: 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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