Treasuries rose, pushing the yield on the 10-year note down from almost 10-month highs, as levels above 2 percent attracted buyers skeptical about the pace of the U.S. economic recovery.
U.S. debt rallied as the gap between 10-year government debt yields in Spain and Germany widened to 3.83 percentage points, the most since Jan. 2, on signs of political turmoil. The Federal Reserve bought $3.2 billion of U.S. securities maturing between February 2020 and November 2022 as part of its plan to bolster the economy.
“It’s a risk-off trade,” said Justin Lederer, an interest rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that trade with the Fed. “The worst is behind us, but there are still concerns and risks that have to be addressed.”
The U.S. 10-year yield fell six basis points, or 0.06 percentage point, to 1.96 percent as of 5 p.m. in New York. It rose earlier to 2.06 percent, the highest since April 12, according to Bloomberg Bond Trader prices. The 1.625 percent note maturing in November 2022 added 17/32, or $5.31 per $1,000 face amount, to 97 3/32.
The 30-year bond yield fell six basis points to 3.16 percent.
The 14-day relative strength index for the 10-year note reached 71, above the level of 70 that suggests it may be about to change direction.
The gap between yields on Treasuries maturing in two- and 10-years narrowed to 1.71 percentage points, the least in a week. It reached the widest since April on Feb. 1
Treasury 10-year yields will reach 2.24 percent by year end, according to the median forecast of 77 economists in a Bloomberg News survey.
The U.S. lowered its net borrowing estimate for the current quarter by $11 billion, reflecting a higher cash balance early in the year.
The Treasury decreased its projected borrowing needs for January through March to $331 billion, the department said in a statement today in Washington. Officials see net borrowing of $103 billion in the quarter starting April 1. In the three-month period that ended Dec. 31, the Treasury borrowed $297 billion. The estimates set the stage for the department’s quarterly refunding announcement on Feb. 6.
Safety demand for Treasuries expanded as Spanish and Italian 10-year government securities fell for a second day as signs of political turmoil in Europe’s so-called periphery damped demand for the debt of both nations.
Spain’s 10-year yields jumped 17 basis points to 5.38 percent, after rising to 5.42 percent, the highest since Dec. 18. The rate on similar-maturity Italian debt increased 10 basis points to 4.43 percent, the most since Jan. 2.
Newspaper El Pais last week published allegations of illegal cash payments, featuring extracts from handwritten ledgers by the former People’s Party Treasurer Luis Barcenas showing payments to officials including Prime Minister Mariano Rajoy, who denied corruption charges. The premier, who is facing opposition calls to resign, visits Berlin today before a European Union summit begins on Thursday.
Benchmark yields climbed earlier today as China’s nonmanufacturing Purchasing Managers’ Index increased to 56.2 in January from 56.1 in December, according to a report yesterday. A number above 50 indicates expansion.
Orders to U.S. factories rose 1.8 percent in December after a revised 0.3 percent decline the month before, the Commerce Department said today. Orders were forecast to increase 2.3 percent, according to the median of 48 analyst forecasts in a Bloomberg survey.
U.S. payrolls increased by 157,000 in January, following a revised 196,000 gain the previous month, the Labor Department said Feb 1. Economists had forecast a gain of 165,000 jobs. The unemployment rate climbed to 7.9 percent.
“Households and retail investors have not gotten on to the risk rally,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “They’re probably overweight government bonds and Treasuries, and that has contributed to the bid we’ve seen.”
Derivatives traders are signaling there’s little chance of a bear market in Treasuries for the next three years.
Demand for insurance against a steep rise in 10-year note yields, the so-called payer skew in options on swaps, has fallen to about its average since 2009, according to Barclays Plc data. The spread between volatility on three-year options that allow investors to pay fixed rates on 10-year interest-rate swaps and those that grant the right to receive fixed rates has narrowed to about 15 basis points from 25 points on June 1.
“The concern and focus of the Fed is still unemployment,” William O’Donnell, head U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, said in an interview on Jan. 28. “And in the Fed’s eyes it’s not good enough yet, so it’s not at all surprising that people who do see higher rates don’t expect a 1994-like movement” when yields surged as the central bank boosted interest rates.
A Bank of America Merrill Lynch index showed Treasuries handed investors a 1 percent loss last month, the worst start to a year since 2009.