Treasuries rose, pushing the 30-year bond yield down the most in almost a month, as the International Monetary Fund’s forecast for slower global growth boosted demand for the refuge of U.S. government debt.
The yield on the 10-year note dropped from the highest level in two weeks as investors sought a haven from Europe’s sovereign-debt crisis, leading to higher-than-average demand for debt at three- and 10-year note auctions this week. The U.S. will sell $7 billion in 30-year Treasury Inflation Protected Securities next week.
“The IMF brought everybody back to the global economic situation,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “We went through roughly six weeks where everything looked more attractive than Treasuries. The auction will do well -- there’s never a sense that people own too many TIPS.”
The yield on 30-year bonds fell 14 basis points, or 0.14 percentage point, to 2.83 percent this week in New York time, according to Bloomberg Bond Trader data, the biggest drop since the week ended Sept. 21. The benchmark 10-year note yield fell nine basis points to 1.66 percent.
The 10-year term premium, a model created by economists at the Federal Reserve that includes expectations for interest rates, growth and inflation, was negative 0.90 percent yesterday. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average for the past 10 years is 0.44 percent. The all-time low was negative 1.02 percent on July 24.
The world economy will expand 3.3 percent this year, the slowest pace since the 2009 recession, and 3.6 percent next year, the IMF said Oct. 9. That compares with July predictions of 3.5 percent in 2012 and 3.9 percent in 2013. The Washington-based lender said it sees a one-in-six chance that growth will slip below 2 percent, signaling “alarmingly high” risks of a steeper slowdown.
The so-called break-even rate, which measures how much traders anticipate consumer prices will rise over the life of the debt, for 30-year securities dropped to 2.42 percentage points after touching 2.69 percent in September, the highest since August 2011.
“There may not be as much inflation as people feared earlier,” Vogel said.
The U.S. will sell inflation-indexed securities on Oct. 18. At the previous auction of the debt on June 21, the U.S. sold $7 billion of the securities at a record low yield of 0.520 percent.
The U.S. sold $66 billion in debt this week, with a $32 billion auction of three-year notes on Oct. 9 yielding 0.346 percent with a record 3.96 bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered.
A $21 billion sale of 10-year debt Oct. 10 yielded 1.7 percent with higher-than-average demand, and a $13 billion auction of 30-year bonds on Oct. 11 yielded 2.904 percent.
Treasuries extended gains yesterday as the Fed bought some of the 30-year bonds auctioned the day before as part of a $1.889 billion purchase of Treasuries maturing from February 2036 to August 2042. The central bank is replacing $267 billion of short-term debt in its portfolio with longer-term Treasuries in an effort to reduce borrowing costs and counter risks of a recession.
“These buybacks are very powerful,” Ray Remy, head of fixed income in New York at Daiwa Capital Markets America Inc., one of 21 primary dealers that trade with the Fed, said yesterday “There’s no supply next week and we’re through supply this week. If nothing else happens in a vacuum, you’re going to move to lower yields because of that.”
Thirty-year bonds have returned 3.3 percent this year, compared with a 2.1 percent gain in the broader U.S. Treasuries market, according to Bank of America Merrill Lynch indexes.
A report Oct. 15 is forecast to show U.S. retail sales rose by 0.8 percent in September, after a 0.9 percent raise in the previous month, according to 63 economists in a Bloomberg News forecast.
The producer price index rose 1.1 percent after a 1.7 percent gain in August, the Labor Department reported yesterday in Washington. A Bloomberg survey of 76 economists called for a 0.8 percent increase. Core producer inflation, which excludes volatile food and energy prices, held steady for the first time since October 2011.
Treasuries extended gains yesterday after Reuters reported that the European Stability Mechanism lacks the cash to bail out Spain if the country asks for help before the end of the year. However, guidelines obtained by Bloomberg News last month showed the fund has the authority to raise cash through the sale of fixed-income securities.
While the European Central Bank announced an unlimited bond-purchase program on Sept. 6 to stem financial turmoil, Spanish Prime Minister Mariano Rajoy has held off on deciding whether to request aid, a condition the bank insists on. European Union leaders will meet in a two-day summit in Brussels next week.
“The market doesn’t want the Europeans to wait too long to find an ultimate solution, but they keep on procrastinating,” said Ira Jersey, an interest-rate strategist at primary dealer Credit Suisse Group AG in New York.