Treasury 10-year note yields touched the lowest level in 12 weeks amid speculation the partial U.S. government shutdown this month curbed growth and will spur the Federal Reserve to keep buying bonds into next year.
Benchmark notes had the first gain in three weeks after lawmakers ended the 16-day closure and avoided a default. Bills due Nov. 21 dropped to negative levels for the first time in more than two weeks. U.S. government securities are the most expensive in almost three months, based on the 10-year term premium. The U.S. is scheduled to release September’s payrolls report on Oct. 22.
“The economic numbers don’t warrant tapering at this point,” said Thomas di Galoma, head of U.S. rates sales at ED&F Man Capital Markets in New York. “They may turn softer because of what’s taken place in Washington over the last month.”
The U.S. 10-year yield dropped one basis point or 0.01 percentage point to 2.58 percent at 5 p.m. in New York after dropping to 2.54 percent, the lowest level since July 24, according to Bloomberg Bond Trader prices. The 2.5 percent note maturing in August 2023 rose 3/32, or 94 cents per $1,000 face value, to 99 10/32. The yield dropped 11 basis points on the week.
Yields on 30-year bonds dropped two basis points to 3.64 percent after touching 3.62 percent, the lowest since Aug. 12.
The rate on $55 billion in bills maturing Nov. 21 dropped to negative 0.005 percent, the lowest level since Oct. 2. It touched 0.21 percent on Oct. 11, the highest level since issuance in May.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 33 percent to $249 billion, from $373 billion yesterday. The average this year is $316 billion.
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index was at 72.46 today, up from 70.09 yesterday, the lowest level since May 24. It climbed on Sept. 5 to 114.2, the highest level in two months. It touched a record low 49 on May 9.
The term premium, a model that includes expectations for interest rates, growth and inflation, fell to 0.21 percent, the lowest level since July 22. The gauge has declined from this year’s high of 0.63 percent set Sept. 5, signaling the cheapest levels of 2013. A positive reading indicates investors are getting yields that are above what is considered fair value.
Treasuries have lost investors 2.2 percent this year, according to Bloomberg US Treasury Bond Index. The Bloomberg Global Developed Sovereign Bond Index has lost investors 2.7 percent in 2013.
The seven-day relative strength index for the Treasury 10-year note yield was at 32 today, down from 40 yesterday and 67 on Oct. 15, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.
The standoff over U.S. fiscal policy that shut the government “encouraged our enemies” and slowed economic growth, President Barack Obama said yesterday. Speaking at the White House after federal agencies opened for the first time since Oct. 1, Obama said the U.S. suffers because of repeated fiscal brinkmanship.
In September, most Fed policy makers said the central bank would probably reduce bond purchases -- used to support the economy by putting downward pressure on borrowing costs -- this year from the current pace of $85 billion a month. The central bank purchased $1.56 billion in Treasuries maturing from February 2036 to February 2043 today as part of the program.
Economists now expect the Fed to delay the first cut to its bond-buying program until March, according to the median estimate of 40 economists in a Bloomberg News survey. In a Sept. 18-19 survey, economists said the central bank would first reduce the purchases in December.
“There’s no reason for them to embark on tapering at a rushed pace,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “You have the anxiety of waiting for economic releases. Over the next month, the 10-year yield will trade between 2.50 and 2.75 percent.”
Fed Bank of Chicago President Charles Evans, an outspoken advocate who has voted for Fed stimulus, said in Chicago today that the Fed keeps encountering problems it didn’t foresee. He said yesterday the central bank should postpone tapering after the shutdown stopped the flow of economic reports.
Even Dallas Fed President Richard Fisher, who has called for reducing asset purchases, told reporters yesterday fiscal discord has undermined the argument for tapering.
The government suspension shaved at least 0.6 percent from U.S. fourth-quarter gross-domestic-product growth, Standard & Poor’s said this week in a report. The economy expanded 2.5 percent in the second quarter, the Commerce Department said on Sept 26.
The shutdown will probably slow fourth-quarter GDP by 0.3 percentage point, according to the median estimate of 40 economists in a Bloomberg News survey conducted Oct. 17 to 18.
The rate on $93 billion of bills maturing on Oct. 24 was at 0.01 percent after touching zero yesterday, according to data compiled by Bloomberg. It was as high as 0.68 percent on Oct. 16, before the agreement to lift the borrowing ceiling, and was negative as recently as Sept. 27.
One-month rates were at 0.005 percent after surging to 0.45 percent Oct. 16, the highest level since October 2008. Even at the height of concern about a default, yields remained lower than historical levels, with one-month rates averaging 1.5 percent in the past decade.
The rally wasn’t enough to lift Treasuries from among the worst-performing bond markets. U.S. government securities due in a decade and more have fallen 8.8 percent this year, based on indexes compiled by the European Federation of Financial Analysts Societies and Bloomberg. Only similar-maturity securities from Switzerland and Sweden fell more among the 144 EFFAS indexes.