Treasuries rose, with 10-year note yields reaching the lowest level in a month, before reports this week that economists said will show U.S. retail-sales growth slowed and inflation was in check.
The yield difference between two- and 10-year notes narrowed to the least since November as investors scaled back economic-growth assumptions. Benchmark yields dropped the most since September on Jan. 10 after a Labor Department report that showed U.S. payrolls increased at the slowest pace since January 2011. One-month bill rates traded negative as the U.S. posted a record December budget surplus as higher payroll taxes, payments from Fannie Mae and Freddie Mac, and a declining unemployment rate helped the government’s finances.
“Next month’s number will be critical in terms of what the Fed does down the road,” said Arthur Bass, managing director in New York at the brokerage Newedge USA LLC, referring to the next jobs report. “We’ve seen a covering of positions and squaring up.”
Benchmark 10-year note yields declined three basis points, or 0.03 percentage point, to 2.83 percent as of 4:59 p.m. New York time, Bloomberg Bond Trader data show. The price of the 2.75 percent note due in November 2023 was at 99 11/32. The yield touched 2.82 percent, the least since Dec. 11.
Rates on Treasury one-month bills traded below zero amid rising demand for short-term debt after reductions to bill auction sizes. The rate was negative 0.0051 percent, the lowest on a closing basis since Dec. 30.
Treasury in December cut four-week bill weekly auction sizes to $18 billion in January from $45 billion on Dec. 3 and the three-month bill size to $28 billion, from $32 billion on Dec. 23.
Treasuries returned 0.8 percent this month after declining 3.4 percent last year, according to Bloomberg World Bond Indexes.
The extra yield investors demand to hold 10-year securities instead of two-year notes fell to 246 basis points, the least since Nov. 29 on a closing-prices basis.
Treasuries traded close to the most expensive level in more than three weeks, based on the term premium, a model that includes expectations for interest rates, growth and inflation. The gauge was at 0.47 percent, according to a Columbia Management model. It reached 0.5 percent on Jan. 10, the most expensive on a closing basis since Dec. 18. The reading is above the 2013 average of 0.02 percent and shows bonds are more fairly valued even with last week’s 14 basis points drop in yields.
“Treasuries are stronger as there is a concern that the weak labor market may bleed into other data points,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “There was a lot of cash on the sidelines that anticipating higher yields, but instead the weak employment report has sent us the other way.”
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased holdings of Treasuries and government-related debt in the firm’s Total Return Fund last month to the highest level since July 2010. Gross increased the proportion of Treasuries and government-related debt in the $237 billion fund to 45 percent in December, compared with 37 percent in the previous month, based on data from the company’s website. Mortgage debt rose to 35 percent, from 34 percent in November.
Five-year notes, which Gross has said represent the best value for Treasuries investors, lost 1.4 percent in December, according to Bank of America Merrill Lynch index data. The debt has gained 0.6 percent this year.
Treasury yields dropped last week as a report showed payrolls increased at a slower pace than expected. The 74,000 gain in December payrolls followed a revised 241,000 advance the prior month, according to Labor Department figures. The median forecast of economists called for an increase of 197,000. The unemployment rate dropped to 6.7 percent, the lowest since October 2008, as more people left the labor force.
“The weaker labor data was a surprise, and the market has repriced to lower yields,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets. “It remains to be seen if this is a trend or just a blip on the radar.”
Federal Reserve Bank of Atlanta President Dennis Lockhart said the December-tapering move acknowledged progress in U.S. employment and reflected improving confidence in outlook.
“I would support similar tapering steps over the course of this year,” Lockhart said in text of speech in Atlanta.
Charles Plosser from the Philadelphia Fed and Richard Fisher from Dallas speak tomorrow.
Retail sales rose 0.1 percent in December, after increasing 0.7 percent in November, according to a Bloomberg News survey of economists before the report tomorrow.
Consumer prices gained 1.5 percent in December from the year before, a separate survey of analysts before the report on Jan. 16 shows. While the figure is an increase from 1.2 percent in November, it is less than the average during the past decade of 2.4 percent.
The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices during the life of the debt, was 2.26 percentage points, just above the 2.22 average over the past decade.
The Fed bought $1.2 billion of TIPS due from February 2040 to February 2043 today as part of its monetary stimulus program.
The central bank said last month it will keep the benchmark federal funds rate target at almost zero “well past the time” unemployment falls below 6.5 percent, especially if projected inflation continues to run below its 2 percent target.
Federal revenue exceeded spending by $53.2 billion, compared with a deficit of $1.19 billion a year earlier, the Treasury Department said in Washington. The median estimate in a Bloomberg survey of 29 economists was for a $44 billion surplus, the same as the Congressional Budget Office’s prediction.
Congress agreed to set the government spending through Sept. 30 at $1.01 trillion. They still must pass legalization this week detailing funding government operations, including the military and health-care services.
Republicans are also yet to determine what they want in exchange for agreeing to raise the debt ceiling, which has been suspended through Feb. 7. Treasury Secretary Jacob J. Lew said the U.S. will exhaust its borrowing authority shortly after that.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $263.4 billion from $478 billion on Jan. 10 that was the highest level since Nov. 20. The 2013 average was $308.4 billion.
A gauge of Treasury volatility, the Bank of America Merrill Lynch MOVE index, declined to 58.92, the lowest level since Nov. 18. The average this year is 71.3.