Treasuries rose on speculation weaker-than-forecast economic growth may prompt the Federal Reserve to reduce its bond-buying program less than some investors anticipated at next week’s meeting of policy makers.
Yields on benchmark 10-year notes dropped from the more than two-year high reached the prior week as reports showed retail sales increased less than forecast, consumer confidence slid more than projected and mortgage applications plunged. The Federal Open Market Committee will decide at its Sept. 17-18 gathering to reduce monthly purchases of Treasuries to $35 billion from $45 billion, according to the median of 34 responses in a Bloomberg survey of economists this month.
“People are paying attention to data not exactly exploding to the upside,” said Michael Lorizio, senior trader at Manulife Asset Management in Boston. “The Fed has laid out its plans. The size may be scaled back.”
Benchmark U.S. 10-year yields declined five basis points, or 0.05 percentage point, to 2.89 percent this week in New York, Bloomberg Bond Trader data showed. The 2.5 percent note due in August 2023 rose 13/32, or $4.06 per $1,000 face amount, to 96 22/32.
The five-year Treasury note yield fell six basis points to 1.69 percent, its biggest drop since the week ended July 19.
Traders are pricing in a 66 percent likelihood that the Fed raises its benchmark overnight rate by January 2015, down from 72.4 percent a week ago.
Retail sales rose in August 0.2 percent, the least in four months, following a revised 0.4 percent July gain that was bigger than previously estimated, the Commerce Department said yesterday. The median forecast of economists surveyed by Bloomberg called for a 0.5 percent advance.
The Thomson Reuters/University of Michigan preliminary September index of consumer sentiment fell to 76.8 from 82.1 last month, which was the lowest since April. A Bloomberg survey estimated a reading of 82.
The Mortgage Bankers Association’s index dropped 13.5 percent in the period ended Sept. 6 to the lowest level since October 2008, the Washington-based trade group said Sept. 11.
“With economic data clearly hitting a skid and taking a turn toward the weaker side, investors are starting to think that maybe the first step of the Fed’s taper won’t be as large as initially thought, and that is giving Treasuries a bid,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “The big question is what the Fed will do if we continue to see weakness.”
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index dropped to 96.17 yesterday, the lowest level since Aug. 27. It climbed on Sept. 5 to 114.19, a two-month high. The 2013 average is 71.
U.S. government bonds have lost investors 0.5 percent since the end of August, on pace for a fifth monthly decline, the longest since a seven-month slump ended March 2011, according to the Bloomberg U.S. Treasury Bond Index. The securities have lost investors 3.8 percent in 2013, according to data as of Sept. 12.
The median forecast of analysts’ predictions compiled by Bloomberg News from Sept. 6 to Sept. 11, is for the 10-year yield to end the year at 2.85 percent and to rise to 3.1 percent by the end of June 2014.
Fed policy makers will also maintain mortgage-bond buying at $40 billion under the Fed’s quantitative-easing program, the survey shows.
“It will be a soft launch,” said Tom Porcelli, chief U.S. economist in New York at Royal Bank of Canada’s RBC Capital Markets, one of the 21 primary dealers that trade with the central bank.
The U.S. central bank has kept the federal-funds target rate at a record-low range of zero to 0.25 percent since December 2008. The Fed will release its 2016 economic projections next week for the first time, including the outlook for the benchmark rate.
In their June assessment, 19 FOMC members were divided on the appropriate benchmark rate in 2015, with four participants saying 1 percent. Three projected 3 percent, three forecast 1.5 percent and another three saw 0.75 percent.
The gap between yields on 10-year Treasury Inflation-Protected Securities and debt not indexed for inflation is 2.11 percentage points, down from 2.26 percentage points a month ago and from 2.61 percentage points on Feb. 4, the high for 2013. The difference represents the bond market’s forecast for the average rise in the consumer price index during the life of the securities.
The yield on 10-year TIPS, 0.79 percent, is down from 0.91 percent on Sept. 5. The yield that day was the highest since April 2011. The U.S. will auction $13 billion of 10-year TIPS on Sept. 19.
Demand for U.S. government debt increased this week at the auctions of $65 billion of U.S. notes and bonds. The $13 billion of 30-year debt sold Sept. 12 attracted bids valued at 2.4 times the amount offered, versus 2.11 last month. The bid-to-cover ratio rose to 2.86 at the $21 billion offering of 10-year notes on Sept. 11, from 2.45 last month, while the three-year note sale on Sept. 10 had the ratio rise to 3.29 from 3.21.
Investors have bid $2.88 for each dollar of the $1.508 trillion in U.S. government notes and bonds sold at auction this year, according to Treasury data compiled by Bloomberg. That’s down from the record $3.15 for the $2.153 trillion sold at last year’s offerings.