Treasuries rose, with 10-year note yields headed for their biggest two-day decline since mid-April, as government and Federal Reserve reports pointed to a weakening economy and slower inflation.
The difference between the yields on the benchmark securities and 10-year U.S. inflation-indexed debt narrowed to an eight-month low. Separate reports showed jobless claims reached the highest level in six weeks and the cost of living fell in April for a second month. U.S. debt rallied as the economic data, including an unexpected decline in the Fed Bank of Philadelphia’s general economic index this month, cooled speculation the central bank may slow its bond-buying program to bolster the economy.
“Treasuries response makes a lot of sense with the numbers we’ve seen,” said Joseph LaVorgna, chief U.S. economist in New York for Deutsche Bank Securities Inc., one of 21 primary dealers that trade with the Fed. “The Fed doesn’t change anything; nothing changes on this data.”
The U.S. 10-year yield dropped five basis points, or 0.05 percentage point, to 1.88 percent at 4:59 p.m. in New York, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 added 15/32, or $4.69 per $1,000 face amount, to 98 26/32. The yield climbed to 1.98 percent yesterday, the highest level since March 15.
Thirty-year bonds rose more than one point, pushing the yield down six basis points to 3.1 percent.
Trading volume dropped to $377.7 billion after reaching $451 billion on May 10, the highest level since Feb. 1, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. The average daily volume for 2013 is $284.4 billion.
Treasuries have dropped 1.1 percent this month as of yesterday, according to Bank of America Merrill Lynch indexes. The debt has lost 0.3 percent this year after gaining 2.2 percent in 2012.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities narrowed to 2.24 percentage points, the least since September.
The Treasury announced it will sell $13 billion in 10-year TIPS on May 23. It sold an equal amount of the securities on March 21 at a yield of negative 0.602 percent.
TIPS handed investors a loss of 2.3 percent in May through yesterday, already making this month the worst since the securities tumbled 8.5 percent in October 2008, according to Bank of America Merrill Lynch indexes. Treasuries overall have declined 1.1 percent.
Fed Bank of Boston President Eric Rosengren said inflation that has “persistently” stayed below the Fed’s goal is a concern and may suggest policy hasn’t done enough to support growth.
“The longer we in the U.S. remain so far below our 2 percent target, the greater the risk that inflation expectations could fall and real interest rates rise,” Rosengren said in the text of prepared remarks delivered in Milan today. Low inflation and high unemployment “could lead one to argue that policy has not been sufficiently accommodative.”
Three other Fed regional bank presidents called for phasing out the Fed’s monthly purchases of $40 billion in mortgage-backed securities as the housing recovery shows signs of gaining momentum.
Dallas Fed Bank President Richard Fisher said today buying mortgage bonds risks disrupting the market, while Philadelphia Fed President Charles Plosser said, “it’s not good for the bank to be holding lots of mortgage paper.” Jeffrey Lacker of Richmond said to reporters yesterday the Fed should “get out of the credit allocation business.”
The U.S. central bank is purchasing $85 billion of government and mortgage debt each month to cap borrowing costs. The central bank purchased $1.45 billion of Treasuries maturing between February 2036 and May 2043 today, according to the New York Fed’s website.
Yields dropped as the Labor Department reported that initial jobless claims increased to 360,000 in the week ended May 11. The median forecast of 50 economists in a Bloomberg News survey was for a rise to 330,000 from 323,000 the previous week.
“The higher claims is probably the most disturbing news,” said Ira Jersey, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG. “The Fed is justified in continuing its asset-purchase program and easy monetary policy.”
The consumer price index decreased 0.4 percent, the biggest decrease since December 2008, after falling 0.2 percent in March, according to Labor Department figures released today in Washington. Economists surveyed by Bloomberg projected a 0.3 percent drop, according to the median estimate. The so-called core price measure, which excludes more volatile food and energy costs, increased 0.1 percent, less than projected.
“There’s no inflation,” said Thomas di Galoma, senior vice president of fixed-income rates trading at ED&F Man Capital Markets in New York. “The data is fairly anemic. There’s a good case to be made for the rally in the bond market. The only thing that was promising was permits on the housing front.”
The Fed Bank of Philadelphia’s general economic index fell to minus 5.2 in May from 1.3 the prior month. The median forecast of 57 economists surveyed by Bloomberg called for a gain to 2. Estimates ranged from minus 5 to 5.
Housing starts slumped 16.5 percent, the most since February 2011, to an 853,000 annualized rate after a revised 1.02 million pace in March, the Commerce Department reported today in Washington. The median estimate of 81 economists surveyed by Bloomberg was for a 970,000 rate.
Building permits increased 14.3 percent to a 1.02 million annualized rate in April, the highest level since June 2008, exceeding the median forecast of 941,000.