Treasuries Head for Weekly Gain as Inflation Seen in Check

Treasuries headed for a third weekly gain, the longest run in more than five months, before data economists said will show the Federal Reserve’s preferred inflation gauge declined last month even as spending increased.

The Bloomberg U.S. Treasury Bond Index has risen 0.8 percent in September, reducing 2013’s loss to 2.5 percent. The personal consumption expenditures deflator probably rose 1.2 percent in August from a year earlier, slowing from 1.4 percent in July, based on a Bloomberg News survey of economists ahead of the report today. Personal spending gained 0.3 percent from the month before, the survey showed.

U.S. 10-year yields were little changed at 2.66 percent as of 1:36 p.m. in Tokyo, Bloomberg Bond Trader data show. The 2.5 percent note due in August 2023 traded at 98 19/32. The yield climbed to 3.01 percent earlier this month on expectations the Fed would trim its bond-buying program and then fell after policy makers unexpectedly maintained purchases and cut their outlook for the economy.

“U.S. growth is unlikely to accelerate greatly,” said Jin Kenzaki, a foreign bond strategist in Tokyo at Royal Bank of Scotland Group Plc’s RBS Securities unit. “Treasuries have been oversold.” Ten-year yields may fall to 2.45 percent in the near term, he said.

The Fed in its statement last week reiterated its concern that inflation below its 2 percent target may pose risks to the world’s biggest economy.

Japan’s 10-year yield was little changed at 0.685 percent. The Bloomberg Japan Sovereign Bond Index rose 0.5 percent this month and has returned 1.9 percent in 2013.

Auction Results

Treasuries declined yesterday as the U.S. sold $29 billion in seven-year debt to weaker-than-average demand.

The auction bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.46, versus an average of 2.63 for the past 10 sales before yesterday’s. It was the last of three note sales this week totaling $97 billion.

Treasuries also fell yesterday as a Labor Department report showed initial claims for jobless benefits in the U.S. decreased by 5,000 to 305,000 in the week ended Sept. 21. A Bloomberg News survey of economists projected an increase.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index rose 3 percent to 77.6. The average for the past year is 68.81.

For the week, 10-year yields have fallen seven basis points. A basis point is 0.01 percentage point. The last time yields dropped for three weeks was in a row in the period ended April 5.

Washington Showdown

A confrontation between President Barack Obama and House Republicans over the federal budget helped drive demand for the relative safety of U.S. debt. If Congress can’t agree on a stopgap spending bill, the federal government faces a shutdown of non-essential services on Oct. 1, the start of the fiscal year. Separately, Congress must vote to raise the nation’s borrowing limit.

Jeffrey Gundlach, manager of the top-performing DoubleLine Total Return Bond Fund, said the Fed won’t lower its monthly asset purchases until a new chairman takes over at the central bank at the end of January.

The Fed has indicated that a cut in its $85 billion of monthly bond purchases will depend on economic data, and it’s unlikely that those numbers will improve sufficiently by next month to warrant a reduction in the purchases by October, Gundlach said yesterday on a conference call with investors.

Gundlach Performance

Gundlach’s DoubleLine Total Return Bond Fund returned 0.3 percent this year through yesterday, putting it ahead of 92 percent of rivals. It gained an annualized 6.9 percent over the past three years, ahead of 97 percent of peers, according to data compiled by Bloomberg.

Fed Bank of Kansas City President Esther George, who has dissented against adding stimulus, said labor-market gains warrant tapering the Fed’s bond purchases immediately and halting buying by mid-2014.

“Recognizing that there has been clear, ongoing improvement in the labor market and other parts of the economy is not to suggest the end of accommodative policy, but instead acknowledges that it is time to move away from using policy tools that were appropriate during the financial crisis and begin the long process of adjusting policy to more normal conditions,” she said yesterday in a speech in Denver.

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