Treasuries Gain on Inflation Data, Increase in Jobless Claims

Treasuries gained for a second week as reports that showed consumer prices excluding food and fuel were unchanged and jobless claims unexpectedly rose spurred speculation the Federal Reserve will keep rates low.

Two-year note yields dropped below 1 percent for the first time in almost a month yesterday as the Securities and Exchange Commission sued Goldman Sachs Group Inc. for fraud and an index of U.S. consumer sentiment unexpectedly declined. Producer prices rose 0.5 percent in March, according to the median estimate in a Bloomberg News survey before a report next week.

“Good inflation data is signaling to the Fed that there’s no hurry to raise rates,” said David Brownlee, head of fixed income at Sentinel Asset Management in Montpelier, Vermont, which manages $22 billion. “Bonds seem to me to be cheap.”

The 10-year note yield fell 11 basis points on the week, or 0.11 percentage point, to 3.76 percent, according to BGCantor Market Data. The yield on April 5 rose above 4 percent for the first time since June. The 3.625 percent security maturing in February 2020 gained 29/32, or $9.06 per $1,000 face amount, to 98 27/32.

Shares of Goldman Sachs slid as much as 16 percent yesterday after it was sued by regulators for fraud tied to collateralized debt obligations that contributed to the worst financial crisis since the Great Depression.

‘Completely Unfounded’

“The SEC’s charges are completely unfounded in law and fact and we will vigorously contest them and defend the firm and its reputation,” Goldman Sachs said in a statement.

Consumer prices rose 0.1 percent in March, in line with forecasts, while the core rate held steady, reflecting cheaper rents and clothing.

U.S. debt rose yesterday as confidence among U.S. consumers unexpectedly fell to the lowest level in five months. The Reuters/University of Michigan preliminary April consumer sentiment index fell to 69.5 from 73.6 in the previous month. The data followed a report on April 14 that showed retail sales rose 1.6 percent in March, the biggest gain in four months.

“The surprising number was consumer confidence as it doesn’t jibe with the recent uptick in retail sales,” said Kevin Flanagan, a Purchase, New York-based chief fixed income strategist at Morgan Stanley Smith Barney. “The theme for this week has been establishing the new range for the 10-year note. We tested four percent and established it as a new top.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, narrowed to 2.34 percentage points, from this year’s high of 2.49 percentage points in January. The five-year average is 2.15 percentage points.

‘Bullish on Treasuries’

“We remain bullish on Treasuries and favor expressing this in the front end,” analysts at BNP Paribas SA wrote in a report on April 15. “The downside surprise in core CPI this week, along with stable inflation expectations and relatively contained TIPS breakevens, all should lead the market to expect the Fed to remain on the sidelines for the foreseeable future.”

Central bank officials indicated the recovery won’t generate enough jobs or inflation to change a pledge to keep interest rates low when they meet this month.

Fed Chairman Ben S. Bernanke told Congress on April 14 that high unemployment and weak construction are among the “significant restraints” on the pace of growth. He repeated the Fed’s view that borrowing costs are likely to stay low for an “extended period” as the economy contends with weak construction spending and high unemployment.

Hawkish Comments’

“Don’t be misled by occasional hawkish comments,” John Richards and Jim Lee, strategists at Royal Bank of Scotland Group Plc in Stamford, Connecticut, wrote in a note to clients on April 15. The firm is one of 18 primary dealers that trade with the Fed. “With inflation quiescent and Bernanke reiterating the ‘extended period’ language yesterday, the lower-longer group at the Fed is in firm control.”

Declining confidence threatens to restrain household spending, which accounts for about 70 percent of the economy. While recent figures showed retail sales picked up in March, a 9.7 percent unemployment rate and mounting home foreclosures are risks for the recovery.

“There is concern that the recent optimism in consumer spending is unsustainable without clear improvement in the unemployment rate,” said Christian Cooper, an interest-rate strategist at primary dealer Royal Bank of Canada in New York.

Initial jobless claims jumped by 24,000 to 484,000 in the week ended April 10, the Labor Department reported on April 15. Economists forecast claims would fall to 440,000, according to the survey median.

‘Remains a Worry’

“The growth data is looking better but it remains a worry that jobless claims have not fallen to a level that is consistent with job growth,” said Carl Lantz, head of interest-rate strategy at Credit Suisse AG in New York, another primary dealer. “The labor market is not clicking on all cylinders. We are still a long way from there.”

Treasuries also gained as European Union finance ministers yesterday told Greece to brace itself for the International Monetary Fund’s conditions for granting a bailout package for the debt-strapped nation. The yield premium investors demand to hold Greek 10-year bonds instead of benchmark German bunds rose for a fourth day.

“The endless Greece saga is just not going away,” said Ward McCarthy, chief financial economist at primary dealer Jefferies & Co. Inc. in New York. “Greece sort of provides a failsafe bid under Treasuries.”

Hedge-fund managers and other large speculators increased bets in the futures market in the week ended April 13 that 10-year notes will decline, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 274,741 contracts on the Chicago Board of Trade. So-called net-short positions rose by 30,008 contracts, or 12 percent, from a week earlier, the Washington- based commission said in its Commitments of Traders report.

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