Treasury Yields Reach Lowest Levels This Year as Deadline Nears

Treasuries rallied, driving 10- and 30-year yields to the lowest levels this year, on speculation lawmakers will break a deadlock over raising the nation’s debt limit and avoid defaulting on the nation’s $9.34 trillion of marketable debt outstanding.

Returns on U.S. government debt have recouped all of their June losses as the government said today U.S. gross domestic product grew more slowly than forecast in the second quarter. At the same time, rates on bills maturing just after the Aug. 2 debt-ceiling deadline rose for a seventh straight day. The U.S. would delay quarterly auctions of U.S. notes and bonds if there’s no extension of the cap before next week.

“No one expects the U.S. will not be paying its debt,” said David Semmens, a U.S. economist at Standard Chartered Bank in New York. “As we get into the weekend, people will be focused on getting a resolution to the debt crisis, but it also brings the focus back to the weak economic growth we are seeing.”

Yields on 10-year notes tumbled 15 basis points, or 0.15 percentage point, to 2.8 percent at 5:22 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 2.77 percent, the lowest level since Nov. 30. Yields were down 17 basis points this week and fell 36 basis points this month, the most since August. The 3.125 percent notes due in May 2021 climbed 1 9/32, or $12.81 per $1,000 face amount, to 102 25/32.

Thirty-year bond yields slid 14 basis points to 4.12 percent and touched 4.10 percent, the lowest since Nov. 30. They decreased 14 basis points on the week and dropped 25 basis points on the month, the most since August. Two-year note yields fell six basis points to 0.36 percent, the lowest since July 19.

Bill Rates

Rates on the $90 billion of six-month bills due Aug. 4 reached 0.3 percent, the highest level since they were issued.

The U.S. would consider selling cash-management bills if there’s no deal on the $14.3 trillion debt ceiling before next week’s note-and-bond sale announcement, Morgan Stanley said in a client note after Treasury officials met with bond dealers in New York to discuss next month’s quarterly auctions. The Treasury would sell $51 billion of three- and six-month bills on Aug. 1 as scheduled, according to Morgan Stanley, one of the 20 primary dealers required to bid at the sales.

“They’ll delay the auctions and issue short-term cash-management bills and just keep rolling them,” said James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York. “It’s one market where rates can’t get much lower.”

Credit Rating

Treasuries, which have returned 1.12 percent this month as measured by Bank of America Merrill Lynch indexes, fluctuated this week as the standoff between President Barack Obama and House Speaker John Boehner threatened America’s top credit rating.

Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement is reached by the deadline. S&P said it needs to see “a credible solution to the rising U.S. government debt burden.”

The spread between two- and 10-year yields shrank to 2.44 percentage points, the narrowest level since Dec. 3, after the Commerce Department reported that GDP grew at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than previously estimated. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase.

‘Economic Bulls’

“This puts all the economic bulls back into the bull pen,” said George Goncalves, head of interest rate strategy at the primary dealer Nomura Holdings Inc. “This data is the capping stone that confirms the weak trend of data.”

House Republicans said they have the votes today to pass Boehner’s proposal to raise the debt cap and cut spending. Obama, who opposes it, said at the White House the time for compromise is “now.”

Senate Majority Leader Harry Reid said he will move to a vote on his competing plan, and at the same time held out hope for a deal with Republican leaders.

The U.S. will give precedence will to making interest payments on government bonds, an administration official said yesterday.

Rates for borrowing and lending securities in the repurchase-agreement, or repo, market increased to the highest level in five months amid the government stalemate over raising the nation’s debt ceiling.

Repo Rates

The average level of overnight general collateral repo rates traded through ICAP Plc was 0.21 percent at 10 a.m. in New York, when most trading takes place, the highest since Feb. 2.

Hedge-fund managers and other large speculators trimmed bets that U.S. 10-year notes will decline and added to wagers that two-year notes will advance, according to U.S. Commodity Futures Trading Commission data. They increased bets the 30-ytear bond will decline, the data showed.

Speculative short positions on 10-year securities, or bets prices will fall, outnumbered long positions by 24,347 contracts on the Chicago Board of Trade. Net-short positions fell by 14,176 contracts, or 37 percent, from a week earlier. Long positions on two-year debt outnumbered short positions by 13,367 contracts. Net-long positions increased by 6,173 contracts, or 86 percent, from a week earlier, the data showed.

On bonds, speculative short positions outnumbered long positions by 72,348 contracts. Net-short positions rose by 5,198 contracts, or 8 percent, from a week earlier, the data showed.

CUSIPS and due dates of U.S. debt due in August

CUSIP       DUE           AMOUNT
912828FS4   Aug. 31       17.501 Billion
912828LV0   Aug. 31       43.262 Billion
9127952A8   Aug. 25       82.005 Billion
9127953E9*  Aug. 18       87.42  Billion
9128277B2   Aug. 15       26.635 Billion
9127953D1   Aug. 11       93.29  Billion
9127953B5   Aug. 4        90.794 Billion
Total                   $440.907 Billion