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Treasuries Little Changed Before Bullard Speaks Amid QE Debate

Treasuries Are Cheapest in Almost Two Years Before Retail Sales
Traders work in the ten-year U.S. Treasury Note options pit at the Chicago Board of Trade in Chicago. Photographer: Daniel Acker/Bloomberg

June 10 (Bloomberg) -- Treasuries were little changed, following a six-week decline, before Federal Reserve Bank of St. Louis President James Bullard speaks today as policy makers debate whether to reduce the central bank’s stimulus program.

U.S. reports last week showed payrolls rose, while the jobless rate increased. Standard & Poor’s revised its outlook for the U.S. to stable from negative. The Treasury is scheduled to sell $66 billion in notes and bonds this week, beginning with $32 billion in three-year debt tomorrow. Bullard said last month he wants to continue the current pace of bond purchases as slowing inflation remains a concern.

“It’s not about whether the Fed will taper; It is about when and how much and that’s what the market will be analyzing,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “We’ll have a bit of a price discovery as we go into supply.”

The benchmark 10-year yield was little changed at 2.18 percent at 9:02 a.m. New York time, according to Bloomberg Bond Trader prices, after falling to 2.15 percent earlier. The price of the 1.75 percent note maturing in May 2023 was at 96 5/32.

U.S. government securities yield about 22 basis points less than bonds in an index of Canadian, European and Pacific Rim debt, according to Bloomberg World Bond Indexes. The spread is the narrowest since February 2011 as investors demand more to own U.S. bonds instead of their global peers.

The six-week decline is the longest run of losses since May 2009. The Fed will reduce its bond purchases to $65 billion a month at its Oct. 29-30 meeting, according to the median estimate in a Bloomberg survey of economists. The central bank currently buys $85 billion of Treasuries and mortgage securities each month to put downward pressure on borrowing costs.

U.S. Employment

U.S. employers boosted payrolls by 175,000 in May after a revised 149,000 gain in April, the Labor Department said June 7. The median forecast in a Bloomberg survey of economists was for an increase of 163,000. The jobless rate rose to 7.6 percent from 7.5 percent.

Tomorrow’s three-year note auction will be followed by $21 billion of 10-year debt the next day and $13 billion of 30-year bonds on June 13.

A measure of Treasuries volatility climbed to the highest in almost a year last week as investors weighed whether the Fed will slow its bond-buying program as the economy improves.

Volatility as measured by the Bank of America Merrill Lynch MOVE index rose to 84.8 on June 6, the highest since June 2012. The gauge has averaged 62.4 over the past year.

No Inflation

For the first time since 2009, U.S. bond yields are rising at the same time inflation is slowing, providing a cushion for investors in Treasuries whether or not the Fed slows the pace of its debt purchases.

While 10-year yields reached 2.23 percent May 29, the highest since April 2012, the personal consumption expenditure deflator, the Fed’s preferred gauge of inflation, rose 0.7 percent in April from a year earlier, the smallest increase since 2009. The yield gap between Treasury Inflation-Protected Securities, or TIPS, and non-indexed bonds show investors have cut their expectations for consumer price increases to the lowest level since July.

After losing 2 percent last month, the most since December 2009, according to Bank of America Merrill Lynch bond indexes, Treasuries are offering the highest real yields in more than two years. The last time yields rose while inflation slowed was four years ago, following President Barack Obama’s $787 billion stimulus plan. Yields later fell.

“We don’t think inflation is a big threat,” Andrew Wickham, head of U.K. and global fixed-income at Insight Investment Management Ltd., which oversees about $134 billion in bonds and currencies, said in a June 5 presentation in London. “It is very unlikely that we will see any major rise in interest rates for Treasuries from here.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Anchalee Worrachate in London at aworrachate@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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