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Treasury 10-Year Yields Touch Two-Week Low Amid Demand for Haven

Treasury Yields Show Inflation Expectations Fall to 10-Month Low
A boy walks past the U.S. Department of the Treasury building in Washington, D.C. The Treasury Department is scheduled to announce today the sizes of 3-, 10- and 30-year auctions scheduled for sale over three days starting June 11. Photographer: Andrew Harrer/Bloomberg

Treasury 10-year note yields fell to the lowest level in almost two weeks as investors sought the safety of government debt before jobs data tomorrow that will help guide the Federal Reserve’s path on monetary stimulus.

U.S. government securities briefly extended gains as stocks fluctuated after European Central Bank President Mario Draghi refrained from announcing more monetary stimulus. The Labor Department will report tomorrow that nonfarm payrolls increased by 163,000 jobs in May, a Bloomberg survey forecast. The U.S. said it will auction $66 billion in Treasuries next week.

“The market has built in an expectation for something less than consensus from tomorrow’s data, but it’s still an uncertainty,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “The ECB today spooked investors who were looking for more in terms of its commitment to expand monetary policy.”

Yields on benchmark 10-year notes decreased one basis point, or 0.01 percentage point, to 2.08 percent at 5 p.m. New York time, according to Bloomberg Bond Trader prices. They touched 1.99 percent, the least since May 24, after rising earlier to 2.13 percent. The price of the 1.75 percent securities maturing in May 2023 advanced 3/32, or 94 cents per $1,000 face amount, to 97 2/32.

Thirty-year bond yields were little changed at 3.25 percent after they reached 3.17 percent earlier, also the lowest since May 24.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index climbed to 83.6 yesterday, the highest level since June 2012. It has averaged 62.5 in the past year.

Volume Climbs

Trading volume rose 30 percent to $481 billion, from $370 billion yesterday, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Volume surged to $662 billion on May 22, the highest level in data going back to 2004. The average daily volume this year is $306 billion.

Treasuries have lost 1 percent in 2013, according to Bank of America Merrill Lynch indexes, amid speculation the Fed will slow the pace of asset purchases.

“The market is caught between the idea of the Fed possibly paring back or the possibility of job growth not being enough,” said Sean Murphy, a trader at Societe Generale SA in New York, one of the 21 primary dealers that trade with the Fed.

Fed Purchases

The Fed is buying $85 billion of government and mortgage-backed securities each month to support the economy by putting downward pressure on borrowing costs. It purchased $3.68 billion in Treasuries today maturing between March 2019 and May 2020.

Fed policy makers next meet June 18-19.

U.S. stocks slid after jobless claims dropped and the ECB kept its benchmark interest rate at 0.5 percent without announcing further measures to spur the 17-nation euro area’s economy. Draghi said the region’s growth should stabilize at a subdued pace. The Standard & Poor’s 500 Index fell 0.7 percent before erasing losses and ending the day 0.9 percent higher.

The U.S. announced it will sell $32 billion in three-year notes, $21 billion in 10-year debt and $13 billion in 30-year bonds next week in daily auctions that begin June 11.

Pacific Investment Management Co.’s Bill Gross, manager of the world’s biggest mutual fund, said it’s good for the firm to be in U.S. Treasuries and high-quality bonds amid rising risks in the global markets. Stocks, high-yield debt, currencies and emerging-market bonds are all in “disarray,” Gross said during an interview today on Bloomberg Television’s “Market Makers.”

In a posting June 4 on Twitter, Newport Beach, California-based Gross said “30 years of bond bull markets have raised returns and spirits. Now there are doubts. We’re sticking with bonds as long as Fed does.”

Employment Data

Initial claims for jobless benefits in the U.S. decreased by 11,000 to 346,000 in the week ended June 1 from a revised 357,000, Labor Department data showed. The median forecast of 47 economists surveyed by Bloomberg called for a drop to 345,000.

The payrolls report tomorrow is forecast to show the increase in employment in the U.S. almost matched April’s stronger-than-projected gain and that the unemployment rate remained at a four-year low of 7.5 percent.

“People are apprehensive about tomorrow’s number,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, reached the least since July 26. It shrank to as little as 2.08 percentage points.

The TIPS spread expanded to 2.73 percentage points on Sept. 17, the widest since May 2006. It has averaged 2.21 percentage points over the past decade.

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