Treasury 10-year note yields traded at almost a three-month low as signs of a loss of momentum in global economic growth stoked bets the Federal Reserve will delay slowing its stimulus program until next year.
U.S. government debt was poised for a weekly gain as more Americans than forecast filed applications for jobless benefits last week and the trade deficit was little changed in August as imports and exports stalled. Treasury Inflation Protected Securities headed for the biggest two-month increase in more than a year as a sale of $7 billion of 30-year TIPS drew strong demand in the first auction since lawmakers voted to raise the debt ceiling. The U.S. will sell $96 billion in notes next week.
“The Fed’s not going anywhere,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “You have a market that’s going to be capped out in terms of rate. The economic data we’ve seen of late is softening.”
The benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.52 percent at 5 p.m. in New York, according to Bloomberg Bond Trader data. The yield dropped to 2.47 percent yesterday, the lowest level since July 22, and has fallen six basis points this week. The 2.5 percent note due in August 2023 fell 5/32, or $1.56 per $1,000 face value, to 99 27/32.
Demand for Treasuries may be supported by new regulations that would require the biggest U.S. banks to hold enough easily sold assets to survive a 30-day credit drought under Fed liquidity rules that expand on international standards adopted earlier this year.
The Fed liquidity coverage ratio being considered today at a meeting in Washington goes further than the Basel III measure adopted in January and calls for earlier implementation than the European Union. The U.S. plan, most stringent for banks with more than $250 billion in assets or substantial international reach, seeks implementation by 2017 -- two years ahead of Basel’s deadline.
Treasuries returned 0.7 percent this month through yesterday, according to the Bloomberg U.S. Treasury Bond Index, trimming losses this year to 1.8 percent. The Bloomberg Global Developed Sovereign Bond Index gained 1.5 percent in October, paring its 2013 decline to 1.9 percent.
The Treasury announced today it will sell $32 billion of two-year notes on Oct. 28, $35 billion of five-year debt the next day and $29 billion of seven-year securities on Oct. 30.
Today’s 30-year TIPS auction drew a bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, of 2.76, the highest since October 2012, versus 2.48 at the June 20 auction and an average of 2.67 at the 10 previous auctions.
The sale drew a yield of 1.33 percent versus a 1.359 percent average forecast of seven of the Fed’s 21 primary dealers in a Bloomberg News survey. The June sale yielded 1.42 percent.
Indirect bidders, a category of investors that includes foreign central banks, bought 45 percent of the securities, the lowest since June 2012, after buying 60.8 percent at the June sale and an average of 44.2 percent at the past 10 auctions.
Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 19.1 percent of the securities, the highest since June 2012, after a record low 0.4 percent at the June sale. The average the past 10 auctions was 16 percent.
“The auction went better than expected,” said Dan Mulholland, head of Treasury trading at BNY Mellon Capital Markets in New York. “There has definitely been a reach for yield and a reach for the long end. There’s a desire for inflation protection with QE in place probably for a little longer than most people expected.”
The difference between yields on 10-year notes and TIPS, a gauge of expectations for consumer prices over the life of the securities, was 2.18 percentage points. The 10-year average is 2.22 percentage points.
TIPS have returned 2.3 percent in September and October, poised for the best performance since April and May of 2012, according to Bank of America Merrill Lynch indexes.
Demand for inflation insurance is climbing on speculation the Fed will maintain asset purchases at the current level to support for the economy into 2014, increasing projections for gains in consumer prices.
Economists predict the Fed will maintain the current pace of bond purchases until March, according to a Bloomberg survey conducted on Oct. 17-18. The Fed today purchased $1.56 billion in Treasuries maturing between May 2038 and February 2043 as part of its program to lower borrowing costs and boost the economy.
The seven-day relative strength index for the Treasury 10-year note yield was at 31.4 today, rising from 25.8 yesterday, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.
Volatility in Treasuries as measured by the Merrill Lynch MOVE index dropped to 62.05 yesterday, the lowest level since May 21. The average for the past decade is 95.06.
Jobless claims decreased by 12,000 to 350,000 in the week ended Oct. 19 from a revised 362,000 in the prior period, a Labor Department report showed today in Washington. The median forecast of 48 economists surveyed by Bloomberg called for a decrease to 340,000.
Applications in California remained elevated and analysts weren’t able to determine how many non-federal workers filed due to the government shutdown, a Labor Department spokesman said.
The partial government shutdown this month trimmed 0.25 percentage point from fourth-quarter economic growth and cost the U.S. 120,000 jobs in October, Jason Furman, head of the Council of Economic Advisers and Obama’s chief economic adviser, said this week.
Treasury holdings for the 21 primary dealers rose by $23.9 billion or 19.6 percent to a record $146 billion as of Oct. 16, the day before the U.S. was expected to run out of borrowing authority prior to the agreement reached that day to postpone the debt ceiling through Feb. 7.
The International Monetary Fund this month cut its forecast for global economic growth to 2.9 percent in 2013 and 3.6 percent in 2014, from July’s projected rates of 3.1 percent this year and 3.8 percent next year. It also sees inflation across rich countries already short of the 2 percent rate favored by most central banks.
U.S. payrolls rose by 148,000 in September, less than the forecast of 180,000 in a Bloomberg survey of economists. That followed a revised increase of 193,000 in August that was larger than initially estimated, the Labor Department said Oct. 22.
The trade deficit increased 0.4 percent to $38.8 billion from a revised $38.6 billion in July that was smaller than previously reported, the Commerce Department reported today in Washington. The median forecast in a Bloomberg survey of 71 economists called for a $39.4 billion deficit.
“You have the uncertainty of economic data approaching year end -- the market is waiting to get a clear direction on which way the economy is going,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “There will continue to be a bid in the marketplace; 2.40 percent is a reasonable target for the 10-year.”