Treasuries gained for a third week for the first time since September as reports showed the economy’s momentum sputtering as the Federal Reserve begins to taper bond purchases.
Benchmark 10-year note yields touched a one-month low as data showed a slowdown in housing starts and an unexpected decline in consumer confidence following a Jan. 10 Labor Department release that nonfarm payrolls grew at the slowest pace in almost three years. Treasury will announce details of its first offering of floating-rate notes on Jan. 23.
“It’s a function of the data, but it’s also a function of how strong the run-up had been in rates in the latter part of the year,” said Aaron Kohli, an interest-rate strategist BNP Paribas SA in New York, one of 21 primary dealers that trade with the Fed. “When you have a very weak NFP, the subsequent data is viewed through a negative light.”
The benchmark 10-year note yield fell four basis points, or 0.04 percentage point, to 2.82 percent in New York, the lowest level since Dec. 11, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 added 10/32, or $3.13 per $1,000 face amount, to 99 13/32.
The three weeks of gains were the longest since the period ended Sept. 27. The yield had reached 3.05 percent in Jan. 2, the highest level since July 2011.
Treasuries have returned 0.7 percent this year, the best performance through this date since 2010, according to Bank of America Merrill Lynch bond indexes. U.S. government debt declined 3.4 percent last year, the worst performance since 2009 and the fourth time the securities have lost money since the firm began tracking the debt in 1978.
The difference between two- and 10-year yields fell to 2.45 percentage points, touching the least since Nov. 27. The average during the past 12 months is 2.08 percentage points. Historically, a flatter yield curve reflects anticipation of reduced economic growth.
Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures to the least since October, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 50,790 contracts on Jan. 14, down 77,255 contracts, or 60 percent, from a week earlier.
Net long position in 30-year bond futures reached 58,910 contracts, the most since November 2007, CFTC data show.
Consumer prices rose 0.3 percent in December, the most since June, following no change the prior month, the Labor Department said Jan. 16. It matched the median forecast of 87 economists surveyed by Bloomberg.
Producer prices had the smallest annual increase in 2013 in five years, the Labor Department said Jan. 15. The 1.2 percent advance for the calendar year was the smallest since 2008, during the recession that began in December 2007.
“Consumer inflation continues to be a non-issue,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets. “There’s no evidence inflation is decelerating, which is a good sign.”
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, was 2.24 percentage points, the lowest level on a closing basis since Dec. 31.
The central bank said in December it will cut its monthly debt purchases, which focus on mortgage securities and longer-term Treasuries, to $75 billion from $85 billion starting this month.
The policy committee reaffirmed its view that the target for the federal funds rate that banks charge each other on overnight loans will stay at almost zero at least as long as the unemployment rate is more than 6.5 percent, especially if inflation stays below its 2 percent goal.
Housing starts fell 9.8 percent to a 999,000 annualized rate following November’s revised 1.11 million pace, which was the highest since November 2007, the Commerce Department reported in Washington yesterday. The median estimate of 83 economists surveyed by Bloomberg called for 985,000.
The Thomson Reuters/University of Michigan preliminary January index of consumer sentiment fell to 80.4 in January from 82.5 in December. Economists in a Bloomberg survey called for a reading of 83.5, according to the median estimate.
“These numbers are saying that the recovery we thought was ready to explode is anemic, at best,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “The Fed is not going to do anything until they see the whites of the eyes of inflation. Higher rates may be put off into the distance.”
Ten-year yields will climb to 3.40 percent by year-end, based on a Bloomberg survey of economists, with the most recent forecasts given the heaviest weightings.
Treasury said Nov. 6 it plans will sell $10 billion to $15 billion of floating-rate notes Jan. 29. Matthew Rutherford, the Treasury’s assistant secretary for financial markets, told reporters that the floaters would be auctioned monthly, with four new offerings a year and two so-called re-openings of each.
The floating-rate note sales would be the first added U.S. government debt security since Treasury Inflation Protected Securities were introduced in 1997.