Treasuries climbed, led by 30-year bonds, as a report showing U.S. retail sales rose less than forecast last month reinforced bets that slower economic growth will keep inflation low.
The difference between two- and 10-year Treasury yields narrowed for the first time in five days on speculation the pace of expansion is slowing. Federal Reserve Chair Janet Yellen will speak May 15 after saying last week the American economy still needs support from the central bank even as policy makers wind down a bond-purchase stimulus program.
The data didn’t show “much of a change from the very modest recovery we’ve seen in the past 5 1/2 years,” said Donald Ellenberger, who oversees about $10 billion as head of multi-sector strategies at Federated Investors in Pittsburgh. “That’s the reason the bond market is rallying.”
The 30-year yield dropped five basis points, or 0.05 percentage point, to 3.45 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The price of the 3.375 percent security due in May 2044 increased 30/32, or $9.38 per $1,000 face amount, to 98 21/32.
The benchmark 10-year note yield fell five basis points to 2.61 percent after rising to 2.66 percent yesterday, the highest closing level since April 29. Two-year note yields declined two basis points to 0.38 percent.
The yield gap between two- and 10-year notes, called the yield curve, decreased four basis points to 223 basis points. A flattening yield curve usually means investors are betting on slower economic growth.
The amount of Treasuries traded today through Icap Plc, the largest inter-dealer broker of U.S. government debt, rose for the first time in three days, increasing 27 percent to $267 billion. The average this year is $340 billion.
Treasuries extended earlier gains as the Commerce Department reported retail sales increased 0.1 percent after a revised 1.5 percent surge in March that was the biggest since March 2010. The median forecast of 83 economists surveyed by Bloomberg called for a 0.4 percent advance.
“The weak retail-sales number was bothersome and has given the market a boost and pulled in some of the short-covering guys,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. A short position is a bet the price of a security will fall. “We are all expecting improvement, but we are not getting it, and that, combined with geopolitical risk, is keeping us near these low-rate levels.”
The difference in yields between U.S. 10-year notes and comparable inflation-linked securities, a gauge of traders’ outlook for consumer prices over the life of the debt called the break-even rate, touched 2.14 percentage points, the least since April 16. The average this year is 2.18 percentage points.
The U.S. consumer-price index rose 2 percent in April from a year earlier, versus 1.5 percent in March, according to economists polled by Bloomberg forecast before a May 15 report. The gauge hasn’t risen past 2 percent since October 2012.
The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, has fallen short of the bank’s 2 percent target for almost two years. The gauge rose 1.1 percent in March from a year ago, a report on May 1 showed.
Yellen is due to address the U.S. Chamber of Commerce this week. She said in testimony to Congress last week the U.S. economic recovery is uneven and and the economy still requires support. While data show “solid growth” in the second quarter, “many Americans who want a job are still unemployed” and inflation remains low, she said.
The U.S. central bank is unwinding the bond-buying program it has used to hold down longer-term borrowing costs and spur growth. It has cut monthly purchases by $10 billion at each of the past four policy meetings, from $85 billion last year, and has said further reductions are likely in “measured steps” if economic progress continues.
The Fed bought $1 billion of Treasuries today due from November 2039 to August 2043 as part of the stimulus program.
Policy makers have kept their target for the overnight lending rate between banks in a range of zero to 0.25 percent since December 2008 to support the economy.
Growth won’t gather much more traction in the coming years, according to Bill Gross’s Pacific Investment Management Co. The firm manages the world’s biggest bond bond fund.
Pimco, which under former Chief Executive Officer Mohamed El-Erian popularized the term “new normal” to describe an era of below-average economic growth following the financial crisis, now says the global economy will be stuck in a “new neutral” for the next three to five years.
The period will be characterized by a convergence of the largest economies to slower yet more stable growth rates, Pimco said in a report today outlining the conclusions from its annual Secular Forum held last week. With little risk of runaway inflation, interest rates will remain below pre-crisis levels, Pimco said.
“We think of the new neutral as a natural evolution from the new normal,” Executive Vice President Richard Clarida, who oversaw the annual forum at the Newport Beach, California-based firm for the first time this year, said in a telephone interview. “The new neutral looking forward is a story about a global economy that isn’t recovering, it’s a global economy that’s converging to trend rates of growth that will be sluggish.”
Treasuries gained earlier as Chinese data showed industrial output and investment growth both slowed and German investor confidence fell for a fifth month.