Treasuries Advance as Inflation Trails Fed Target

Treasury 10-year yields fell below 2 percent as inflation last month trailed the Federal Reserve’s 2 percent long-term objective, giving the central bank scope to continue bond buying to bolster the economy.

The benchmark yield reached a one-week low as the consumer price index was unchanged in January and was up 1.6 percent from a year earlier. The 10-year note has erased its decline this month after posting the biggest jump in yield in January since March 2012 even as central-bank policy makers appear divided about how long the Fed should keep purchasing debt securities.

“Over time, the information isn’t strong enough to keep the Fed out of the game,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “I’m looking for a range-bound market.”

The 10-year yield fell three basis points, or 0.03 percentage point, to 1.98 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 rose 9/32, or $2.81 per $1,000 face amount, to 100 7/32.

The yield reached the lowest since Feb. 12 and is at the 1.98 percent closing level on Jan. 31.

Price Swings

Treasury market volatility, as measured by the Bank of America Merrill Lynch MOVE index, declined to 57.9 yesterday, the lowest since Jan. 24 and down from the 59.74 average since the Fed announced $40 billion a month in mortgage purchases.

The Treasury announced plans to sell $99 billion of notes next week. It will auction $35 billion of two-year securities on Feb. 25, the same amount of five-year debt the following day and $29 billion of seven-year notes on Feb. 27.

The central bank bought $3.6 billion of Treasuries maturing from November 2018 to February 2020 today, according to the Fed Bank of New York’s website.

Several policy makers said the Fed should be ready to vary the pace of its $85 billion in monthly bond purchases, according to the minutes of the central bank’s Jan. 29-30 meeting released yesterday in Washington.

The central bank my halt its bond buying in January 2014, depending on the pace of the economy Bill Gross, co-chief investment officer and founder of Newport Beach, California-based Pacific Investment Management Co., wrote in a Twitter post.

Fed Watch

Primary dealers expect the Fed to reduce the pace of asset purchases by the beginning of 2014, with a majority anticipating an end to mortgage-bond purchases by January, a survey showed. The median respondent in the survey by the Fed Bank of New York saw the central bank buying $20 billion in Treasuries per month and no mortgage securities in January 2014, according to the survey conducted before the FOMC meeting.

Stocks declined around the world on concern that the Fed could reduce its monetary accommodation. The euro fell below $1.32 for the first time since Jan. 10 as a composite index of factory and services output in the 17-nation currency bloc fell to 47.3 from 48.6 in January, London-based Markit Economics said. A reading below 50 indicates contraction.

“As soon as you have two or three arguments from whatever source that argue against taking on more risk, the markets are all going to pull back,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee.

Debt Sale

The U.S. sold $9 billion of 30-year inflation-protected securities at a yield of 0.639 percent, compared with an average forecast of 0.625 percent in a Bloomberg News survey of seven of the Fed’s 21 primary dealers.

The Treasury Inflation Protected Securities sale’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.47, versus an average of 2.72 at the eight auctions since 2010.

The yield on current 30-year TIPS has increased to 0.57 percent from 0.39 percent at the end of 2012. Inflation-indexed debt pays interest at lower rates than nominal Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index.

TIPS maturing in 15 years or more have lost 4.3 percent this year, compared with a decline of 4.4 percent for regular Treasuries with comparable maturities and a drop of 5.2 percent for 30-year U.S. government bonds, Bank of America Merrill Lynch indexes show.

Yield Difference

The difference in yield between 30-year TIPS and regular Treasuries of 2.56 percentage points is 0.05 percentage point higher than at the end of the year. The gap, which serves as a gauge of expectations for consumer prices during the life of the debt, reached 2.63 percentage points on Feb. 5, the highest since Sept. 14, the day after the Fed announced it would begin purchasing $40 billion per month of mortgage securities.

The 0.3 percent rise last month in core inflation, which excludes more volatile food and energy prices, was higher than the 0.2 percent rise forecast by 82 economists in a Bloomberg News survey.

“Inflation is the critical cog to the timing of interest rates rising,” said Tom Graff, who manages $3.6 billion of fixed-income assets at Brown Advisory Inc. in Baltimore. “It looks to be flat to mildly accelerating, which tells me a real change in Fed policy is quite a ways away.”

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