Treasuries advanced, with 10-year notes gaining for the first time in eight days, ending their longest run of declines in more than a year.
Treasury inflation-linked securities headed for their second-worst monthly slump on record before U.S. data tomorrow that economists said will show the Federal Reserve’s preferred measure of inflation was near an all-time low. Federal Reserve Chairman Ben S. Bernanke said last week the central bank may reduce bond buying this year if economic growth is in line with central bank projections. The U.S. will sell $35 billion of five-year notes today.
“Treasuries appear to be consolidating after the recent selloff but sentiment remains fragile,” said Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Today’s five-year auction will provide a good gauge of investor demand.”
The benchmark 10-year yield fell three basis points, or 0.03 percentage point, to 2.58 percent at 6:49 a.m. New York time. The 1.75 percent note due in May 2023 rose 9/32, or $2.81 per $1,000 face amount, to 92 27/32. The yield had risen for the previous seven days, the longest run since the period ended March 19, 2012.
Government bonds around the world are poised for their worst quarter since at least 1997, according to Bank of America Merrill Lynch indexes.
Securities in the Global Broad Market Sovereign Plus Index lost 2.3 percent this quarter through yesterday, set for the biggest decline since the indexes began tracking the data on Dec. 31, 1996. While the average yield on the securities has climbed to 1.79 percent from 1.43 percent on March 31, it is still below the average of 2.06 percent for the past five years.
The Fed has been buying $45 billion of U.S. government debt and $40 billion of mortgage securities every month to put downward pressure on borrowing costs in the third round of its quantitative-easing program.
Bernanke, speaking on June 19, said reducing bond purchases would depend on the economy achieving the central bank’s objectives. Policy makers are forecasting growth of as much as 2.6 percent this year and 3.5 percent in 2014.
U.S. gross domestic product expanded 2.4 percent in the first three months of this year, unchanged from the preliminary reading, according to a Bloomberg survey of economists before the data is released today.
The five-year note yield declined four basis points to 1.45 percent after climbing to 1.56 percent on June 24, the highest level since July 2011.
The U.S. last sold five-year notes on May 29 at a yield of 1.045 percent, the highest since October 2011, and up from 0.71 percent in April. The securities being sold today yielded 1.45 percent in pre-auction trading.
The government auctioned $35 billion of two-year notes yesterday and will sell $29 billion of seven-year debt tomorrow.
TIPS handed investors a 5.4 percent loss this month through yesterday, according to an index compiled by Bank of America Merrill Lynch. That would be the biggest monthly slide since October 2008. The securities have lost 9.4 percent this year.
The difference in yield between 10-year notes and Treasury Inflation Protected Securities, a measure of expectations for inflation over the life of the debt, was little changed today at 1.98 percent after shrinking to 1.81 percentage points on June 24, the narrowest since October 2011.
“Core inflation measures show the trend of an increasing slowdown,” said Shinichiro Kadota, a strategist for non-yen debt at Barclays Plc in Tokyo “With the Fed expected to taper bond buying, real yields will probably continue to underperform,” he said, referring to inflation-linked notes.
Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index declined to 108.44 yesterday from 110.98 on June 24, which was the highest since November 2011.