Treasury 10-year note yields dropped to the lowest level in a week as a report showed manufacturing slowed more than forecast in February in the New York region, adding to speculation the U.S. economic recovery is faltering.
The yield gap between U.S. two- and 10-year notes, called the yield curve, narrowed to a one-week low as separate data showed confidence among U.S. homebuilders plunged in February by the most on record. Investors outside the U.S. increased holdings of Treasuries in December by the most since 2011. The Federal Reserve will release minutes tomorrow of its January meeting, when it decided to cut bond-buying a second time.
“The general theme of softer-than-expected data is what’s driving the most immediate rally,” said Aaron Kohli, an interest-rate strategist in New York at BNP Paribas SA, one of 22 primary dealers that trade with the Fed. “The minutes will be useful to help guide us through which topics were most contentious among the members. They have set the bar fairly high to consider any tapering change.”
Ten-year yields dropped four basis points, or 0.04 percentage point, to 2.71 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data. They touched 2.69 percent, the lowest level since Feb. 11, after climbing on Feb. 13 to 2.78 percent, the highest since Jan. 29. The price of the 2.75 percent security due in February 2024 increased 10/32, or $3.13 per $1,000 face amount, to 100 3/8.
Two-year yields fell one basis point to 0.3 percent.
The difference between two- and 10-year note yields shrank to 2.41 percentage points, the narrowest on a closing basis since Feb. 11. Historically, a flatter yield curve reflects anticipation of reduced economic growth.
Volatility in U.S. government securities measured by the Bank of America Merrill Lynch MOVE Index sank to 55.99, the lowest level since May, in its eighth daily decline, the longest stretch since September. The average this year is 64.62.
Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, rose 11 percent to $260 billion. The average this year was $327 billion. It dropped to $233 billion on Feb. 10 after reaching a seven-month high of $494 billion on Jan. 29.
Rates on U.S. one-month bills were little changed at 0.0101 percent today after jumping to 0.1369 percent on Feb. 4, the most since October, amid concern Congress would deadlock over a debt-limit suspension that was due to expire Feb. 7. Rates dropped last week after Congress approved a suspension of the debt ceiling until March 2015. President Barack Obama signed the legislation on Feb. 15.
The stake in Treasuries held by investors outside the U.S. rose 1.4 percent, or $78 billion, in December, according to Treasury data. That pushed foreign holdings of the debt to a record $5.79 trillion. Overseas investors held 49 percent of the $11.87 trillion in publicly tradable U.S. government debt outstanding at the end of 2013.
For all of 2013, foreign holdings of Treasuries rose 4 percent, or $221.1 billion, the least since 2006.
China, the biggest foreign lender to the U.S., reduced its position in Treasuries by 3.6 percent, the most since December 2011, to $1.27 trillion. Chinese holdings of U.S. government debt rose 4 percent in 2013, the second annual increase after dropping in 2011 for the first time on record, according to Treasury data.
Treasury holdings in Japan, the second-largest overseas lender to the U.S., rose for a sixth year, climbing 6.4 percent to $1.18 trillion, Treasury data show. The country’s investors pared their position 0.3 percent in December.
The Fed Bank of New York’s Empire State manufacturing index fell to a reading of 4.48, from 12.51 in January. Economists surveyed by Bloomberg forecast 8.5 for February. The report followed Fed data Feb. 14 showing U.S. factory production fell 0.8 percent in January. Assembly lines slowed as colder weather tempered production, the Fed said then.
The National Association of Home Builders/Wells Fargo sentiment gauge slumped to 46 this month, from 56 in January, figures from the Washington-based group showed today. Readings less than 50 mean more respondents reported poor market conditions than good. The measure was weaker than the most pessimistic projection in a Bloomberg survey of economists.
“You’re probably range-bound until people determine if there’s an economic slowdown,” said Dan Greenhaus, chief global strategist in New York at BTIG LLC.
Ten-year note yields touched 3.05 percent on Jan. 2, the highest level since July 2011, and reached a three-month low of 2.56 percent on Feb. 3. The yields will rise to 3.40 percent by year-end, according to the median forecast of financial institutions surveyed by Bloomberg.
Storms in the U.S. hurt housing, manufacturing and consumption indicators, according to a Feb. 14 report by the primary dealer Morgan Stanley. Second-quarter economic growth may increase to 4 percent from 1 percent in the first, according to the report.
The Fed will release the minutes tomorrow of its Jan. 28-29 policy meeting. The central bank decided Jan. 29 to cut its monthly purchases of Treasuries and mortgage debt to $65 billion from $75 billion in its second $10-billion reduction in as many meetings. The purchases designed to cap long-term borrowing costs and fuel growth.
Fed Chairman Janet Yellen pledged in Feb. 11 congressional testimony she would scale back stimulus in “measured steps” and said only a “notable change” in economic prospects would prompt a slowing in the pace of reductions.
“The threshold for stopping the taper is higher than in the past, and the Fed is intent on unwinding the asset purchase program,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “It’s a stay-the-course message from the Fed, but it will be important to see the discussion internally.”
The Bloomberg U.S. Treasury Bond Index has risen 1.6 percent this year, after dropping 3.4 percent in 2013.
Treasuries gained 1.6 percent in the Bank of America Merrill Lynch U.S. Treasury Index in January, the best start to a year since 2008. Investors sought safety as the Fed began to slow the stimulus that fueled risk appetite worldwide.