Treasuries Set for Monthly Gain on Slower Growth, Europe

Treasuries posted their biggest monthly gain since September as slowing U.S. economic growth and concern Europe’s debt crisis is worsening increased demand for the relative safety of U.S. debt.

Ten-year note yields fell for a third day as consumer spending climbed less than forecast in March and as business activity expanded in April at the slowest pace since November 2009. Yields declined earlier as Spain entered its second recession since 2009. Economists predict Labor Department data this week will indicate U.S. hiring increased in April, though not enough to reduce the jobless rate.

“There’s definitely that feeling that our growth is fading,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “Europe looks like the same mess that it was. There’s a lot of risk out there, and that’s got people concerned.”

The 10-year note yield fell two basis points, or 0.02 percentage point, to 1.91 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent security due in February 2022 gained 6/32, or $1.88 cents per $1,000 face amount, to 100 3/4. The yield has fallen from 2.21 percent at the end of March.

Treasuries handed investors a 1.5 percent gain this month as of April 27, Bank of America Merrill Lynch indexes show.

Household Purchases

Household purchases, which account for about 70 percent of the economy, increased 0.3 percent, after a revised 0.9 percent gain the prior month, Commerce Department figures showed in Washington. The median estimate in Bloomberg News survey called for a 0.4 percent rise.

The Institute for Supply Management-Chicago Inc. said its business-activity barometer decreased to 56.2 during April, lower than the most pessimistic forecast in a Bloomberg News survey, from 62.2 in March. Readings greater than 50 signal growth.

Payrolls rose by 164,000 in April after a 120,000 gain in March, which followed three months of gains above 200,000, while the jobless rate stayed at 8.2 percent, according to other Bloomberg surveys before the May 4 data.

“The two drivers that pushed rates back up were inflation expectations and then the concern that the Fed would look at first-quarter numbers and get more bullish on the economy,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. Those risks now, he said, “are not anywhere on the horizon for the next couple of months.”

Spain Recession

Spain’s gross domestic product fell 0.3 percent last quarter, the same as the previous three months, a government report showed today. European leaders will seek to restore market calm this week after Spain was cut by Standard & Poor’s and a German-led austerity agenda to resolve the debt crisis came under fire ahead of elections in France and Greece.

“If Europe continues to delve deeper into a recessionary environment and the U.S. economic outlook slows, we could see another sequence of demand that could easily push yields out of their current range,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “We aren’t at that point yet.”

The Treasury Department lowered its net borrowing estimate for the current quarter, reflecting lower government spending and higher issuance of state- and local-government securities.

The Treasury’s net borrowing estimate for April through June is now $182 billion, $19 billion less than estimated in January. U.S. officials also see net borrowing of $265 billion in the quarter starting July 1. The estimates set the stage for the Treasury’s quarterly refunding announcement on May 2.

Fed Buying

The Fed bought $1.833 billion of Treasuries due from February 2036 to February 2042 today as part of its program, known as Operation Twist, to replace $400 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs further and counter rising risks of a recession.

As part of the operation, the Fed intends to purchase during May approximately $45 billion of longer-term Treasuries while selling about $43 billion of shorter-term securities, according to the New York Fed’s website.

The Fed bought $2.3 trillion of bonds in two rounds of so-called quantitative easing from December 2008 to June as part of its efforts to spur the U.S. economy. It has also pledged to keep its target for overnight bank lending at almost zero until at least late 2014.

Chairman Ben S. Bernanke said April 25 the central bank is ready to add to its stimulus if necessary, even after it upgraded its view of the economy.

The odds of an extension to Operation Twist have declined, Anshul Pradhan and Vivek Shukla, analysts at Barclays Capital Inc. in New York, wrote in a report at the end of last week.

Floating-Rate Debt

The difference between 10- and 30-year yields is poised to widen as a result, according to Barclays. The spread reached 1.19 percentage points today, the most since Feb. 6.

The U.S. is scheduled to announce on May 2 the sizes of three-, 10-and 30-year auctions scheduled for next week.

The U.S. may also announce plans to sell floating-rate securities on May 2, Mary Miller, the Treasury Department’s undersecretary for domestic finance, said Feb. 1.

Almost two decades after advising the U.S. to sell so-called floaters to lower debt expenses, Campbell Harvey says starting to issue the securities now would be a costly mistake for American taxpayers.

“In an environment with historically low interest rates, the Treasury should avoid floating-rate debt as it introduces risk,” Harvey, a finance professor at Duke University’s Fuqua School of Business in Durham, North Carolina, said in a telephone interview April 17. “If interest rates go up, it puts the government at risk because they will need to come up with a lot of extra revenue to pay the interest bill.”

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