U.S. 10-Year Yield Lowest in 4 Months as Economic Data Moderates

Treasuries rose, pushing 10-year note yields to the lowest in almost four months, as reports showed consumer confidence unexpectedly dropped and business activity in the U.S. cooled in January.

Benchmark yields fell for a fifth straight day, the longest streak since September, as reports on housing prices, business output and consumer sentiment indicated U.S. economic growth still faces headwinds. Demand for safe assets was supported as European leaders worked toward a financial rescue for Greece. Thirty-year bond yields dropped as the Federal Reserve bought longer-term debt and announced operations for February.

“There’s a lot of talk about the weakening economy,” said Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trades with the Fed. “For now, the market is very well bid and the European crisis has not gone away. The buybacks are starting in a week when there’s no supply.”

Benchmark 10-year yields fell five basis points, or 0.05 percentage point, to 1.8 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices, the lowest since Oct. 4. The 2 percent securities due in November 2021 rose 13/32, or $4.06 per $1,000 face amount, to 101 26/32.

Five-year note yields fell three basis points to 0.70 percent and reached a record low 0.6981 percent. Yields on 30-year bonds dropped six basis points to 2.94 percent after earlier gaining three basis points.

No Bubbles

It’s impossible to have a bond market bubble because investors can expect to receive their money back when the bond matures, according to John Bogle, the founder of mutual fund company Vanguard Group Inc. who popularized index investing.

Buyers of Treasuries at the current low interest rates merely agree to a smaller return for the duration of the bond, Bogle said today at the John C. Bogle Legacy Forum hosted by Bloomberg Link.

Treasuries returned 0.3 percent in January as of yesterday, according to indexes compiled by Bank of America Merrill Lynch. Treasury Inflation Protected Securities gained 1.9 percent.

A measure of government bonds around the world advanced 0.6 percent in January, while global corporate bonds returned 2.2 percent according to the indexes. The MSCI All Country World Index of stocks returned 5.5 percent this month as of yesterday, including reinvested dividends.

Greek Talks

European Central Bank Governing Council member Ewald Nowotny said he “can’t be sure” that Greece will be able to carry out the necessary fiscal and economic measures and stay in the 17-nation shared currency.

Yields fell as the S&P/Case-Shiller index of property values in 20 cities declined 3.7 percent from November 2010 after decreasing 3.4 percent in the year ended in October, the group said today in New York.

The New York-based Conference Board’s confidence index decreased to 61.1, lower than the most pessimistic forecast in a Bloomberg News survey of economists, from a revised 64.8 reading the prior month. The Institute for Supply Management-Chicago Inc. said its business barometer declined to 60.2 from 62.2 in December. Readings above 50 signal growth.

“The economy keeps bouncing between moderate growth and weaker growth, said Steven Ricchiuto, chief economist in New York at primary dealer Mizuho Securities USA, Inc. “Interest rates have no reason to move higher.”

Fed Operations

The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs under a program it announced in September and plans to conclude in June. The central bank said today it will buy about $45 billion of securities and sell about $43 billion during February.

The central bank bought $2.52 billion of securities maturing from February 2036 to November 2041 today, according to the New York Fed’s website.

“That’s probably keeping a little bit of a better bid in the back end of the market,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

The Fed has purchased $2.3 trillion of debt in two rounds of quantitative easing known as QE1 and QE2. The central bank announced on Jan. 25 that it plans to keep its target for overnight bank lending at a record low through at least late 2014, and Fed Chairman Ben S. Bernanke said he’s considering another program of debt purchases.

Treasury Auctions

“One additional factor that could add flattening pressure on the long end of the curve over the next month are large coupon payments in February,” strategist Priya Misra, head of U.S. rates strategy at Bank of America wrote in a report today. “Total coupon payments in February are close to $37 billion 10-year equivalents, compared to $4 billion in January.”

Of that amount, nearly $24 billion in 10-year equivalents of the additional coupon payments are for 30-year bonds, she wrote. If these coupons are reinvested in the same sector, demand will exceed supply and may add to the flattening pressure, she said.

The Treasury will announce tomorrow the sizes of three, 10-and 30-year debt to be sold on three consecutive days beginning Feb. 7. The Treasury has sold $32 billion in three-year notes, $24 billion in 10-year debt and $16 billion in bonds each refunding month since November 2010. Quarterly refundings are held each February, May, August and November.

The Treasury Department lowered its borrowing estimate for the current quarter by 18 percent to $444 billion, reflecting higher receipts and lower spending. The Treasury reduced its net borrowing estimate for January through March by $97 billion from a projection of $541 billion three months ago. U.S. Treasury officials also see net borrowing of $200 billion in the second quarter. The estimates set the stage for the Treasury’s quarterly refunding announcement tomorrow.

Budget Update

The U.S. budget deficit will shrink this year to $1.1 trillion, the Congressional Budget Office said today in a report. The deficit, which would be down from last year’s $1.3 trillion, will fall because of strengthening tax revenue and a sharp slowdown in government spending, the CBO said.

Investors also purchased debt today to increase the duration of their portfolios to match benchmarks at the end of the month, such as the Barclays U.S. Treasury Index. Duration measures how sensitive a bond’s price is to changes in yield.

The Barclays index is expected to extend by 0.01 years for the end of January, compared with 0.03 years at the end of December, according to the firm, a primary dealer.

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