Treasuries Advance Amid Decline in Risk Appetite

Treasuries rose, with 10-year note yields trading at almost a six-month low, as risk appetite declined before the Federal Reserve releases minutes tomorrow of its April policy meeting.

Ten-year notes advanced for the first time in three days. Stocks fell. Fed Bank of New York President William Dudley said the pace of eventual increased in interest rates from virtually zero “will probably be relatively slow.” Fed Chair Janet Yellen, who said last week the world’s biggest economy hasn’t fully regained its health, is due to give a speech tomorrow.

“With growth low, the low interest-rate environment continues,” Paul Montaquila, the fixed-income investment officer at BNP Paribas SA’s Bank of the West, which oversees $62 billion in assets, said from San Ramon, California. “Yield-hungry investors are frustrated, but this is a Fed-driven market, and when the Fed pushes out their timeline for raising rates, the market has to do so, too.”

Ten-year (USGG10YR) note yields dropped three basis points, or 0.03 percentage point, to 2.51 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices, and touched 2.50 percent. They slid on May 15 to 2.47 percent, the lowest since Oct. 30. The price of the 2.5 percent security due in May 2024 climbed 9/32, or $2.81 per $1,000 face amount, to 99 29/32.

Five-year (USGG5YR) note yields sank four basis points to 1.51 percent and touched 1.50 percent, the lowest since March 14. Thirty-year (USGG30YR) bond yields fell as much as four basis points to 3.35 percent before trading little changed at 3.38 percent. They reached 3.30 percent on May 15, the lowest since June 17.

Yield Gap

The yield difference between five-year and 30-year U.S. securities, called the yield curve, reached 188 basis points, the widest since April 15.

One-month implied volatility in U.S. government securities as measured by the Bank of America Merrill Lynch MOVE Index increased to 60.01 basis points, the highest since April 3. It touched a five-week low of 55.27 basis points on May 14. The average this year is 60.62.

The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, increased for a second day, rising 23 percent to $327 billion. The daily average this year is $340 billion, and the high was $606 billion on May 2.

The Bloomberg Global Developed Sovereign Bond Index (BGSV) returned 4.4 percent this year through yesterday, versus a 4.6 percent loss in 2013. The Bloomberg U.S. Treasury Bond Index gained 3.1 percent in 2014 after dropping 3.4 percent last year.

Uneven Growth

Treasuries due in 10 years or more returned 10.8 percent this year through yesterday amid uneven economic growth, turmoil in Ukraine and speculation the European Central Bank will inject stimulus into its economy. The gain was the biggest on a year-to-date basis since 1995, data compiled by Bank of America Merrill Lynch show.

Dudley said the pace of interest-rate increases will depend on the progress of the economy and the reaction of financial markets. Policy makers have held the benchmark rate target in a range of zero to 0.25 percent since December 2008 to support the economy.

“If the response of financial conditions to tightening is very mild -- say similar to how the bond and equity markets have responded to the tapering of asset purchases since last December -- this might encourage a somewhat faster pace,” Dudley told the New York Association for Business Economics. “If bond yields were to move sharply higher, as was the case last spring, then a more cautious approach might be warranted.”

‘Considerable Time’

The Fed reiterated on April 30, after its last policy meeting, that it will keep the key rate target at almost zero for a “considerable time” after concluding the bond-purchase program it has used to fuel growth.

The central bank has cut monthly bond purchases by $10 billion at each of the past four meetings, from $85 billion last year, and has said reductions will continue in “measured steps” as the economy improves.

“A lot of people are hoping there will be some type of guidance coming from the Fed minutes to give us direction,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “The shorter end has done relatively better of late as Janet Yellen has remained noncommittal on how soon fed funds rates would go higher and because of the potential for new ECB easing measures that seem to be imminent.”

Yellen View

Yellen, who’s scheduled to deliver the commencement speech tomorrow at New York University, suggested in March the central bank may raise interest rates in the middle of next year. She has since emphasized the economy is falling short of the Fed’s goals, saying on May 7 that it still needs help from the central bank. She said May 15 the U.S. economy has further to go to achieve full health.

While reports this month showed U.S. employment, manufacturing and housing starts improved, consumer confidence fell and retail sales lagged behind forecasts.

Sales of existing and new homes in the U.S. rose in April, according to Bloomberg News surveys of economists before the figures this week.

Philadelphia Fed Bank President Charles Plosser said the strongest U.S. economy in years, buoyed by a solid housing market, may push the jobless rate below 6 percent by year-end. He spoke Washington. The rate was 6.3 percent last month, the lowest since September 2008.

The Standard & Poor’s 500 Index fell 0.7 percent today.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editors responsible for this story: Dave Liedtka at dliedtka@bloomberg.net Greg Storey, Paul Cox

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