Treasuries Advance as Price Index Gives Fed Room to Keep Buying

Treasuries rose, with yields slipping from almost 11-month highs, as a government report showed U.S. inflation was contained, giving the Federal Reserve scope to maintain its monetary-stimulus program.

Benchmark 10-year note yields dropped below 2 percent yesterday for the first time in six days on a closing basis, ending the longest streak above that level in almost a year, even after data signaled the economy is improving. Consumer prices rose 2 percent in February from a year earlier, below the level the central bank has listed as one condition for backing off on its efforts to spur growth. Policy makers meet next week.

“Things have been coming in better, but I don’t think it’s enough better to get people off the idea that the Fed is going to remain accommodative,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “It’s still all about the Fed.”

Ten-year note yields fell five basis points, or 0.05 percentage point, to 1.99 percent this week in New York, according to Bloomberg Bond Trader data. They had held above 2 percent for the previous five days on a closing basis, the longest since April. The yields reached 2.08 percent on March 8, the highest level since April 5. The price of the 2 percent security due in February 2023 gained 15/32, or $4.69 per $1,000 face value, to 100 3/32.

Thirty-year bond yields decreased three basis points to 3.21 percent after touching 3.28 percent March 8, also the highest since April 5. Two-year notes yielded 0.25 percent.

Yield Gap

The yield difference between two- and 30-year Treasuries narrowed to 2.96 percentage points yesterday from 3 percentage points on March 11, the widest in 11 months.

The consumer price index’s increase came after a 1.6 percent year-over-year gain in January. Core CPI, which excludes food and fuel, also rose 2 percent from February 2012, following a 1.9 percent increase in the prior 12-month period.

Fed policy makers reiterated after their January policy meeting that their key interest rate will stay at almost zero as long as inflation is projected at no more than 2.5 percent and unemployment is above 6.5 percent. Fed Chairman Ben S. Bernanke said this month the Fed will keep buying bonds under quantitative easing until there’s “substantial improvement” in the labor market. The jobless rate was 7.7 percent in February.

The central bank buys $85 billion of Treasury and mortgage debt a month. A two-day Fed policy meeting begins March 19.

Treasuries gained yesterday as a gauge of U.S. consumer confidence unexpectedly slid. The Thomson Reuters/University of Michigan preliminary sentiment index for March fell to 71.8, the lowest since December 2011, versus a forecast for a gain to 78.

‘Not Good’

“The confidence data is not good,” said Tom Simons, an economist in New York at Jefferies LLC, one of the 21 primary dealers that trade with the Fed. “If you looked at all the data this week you would think that the economy was picking up a bit of momentum. There’s been one direction of data and this is the first move in the other direction.”

U.S. retail sales rose 1.1 percent in February, the Commerce Department said March 13, more than twice the forecast in a Bloomberg survey. Initial Jobless-benefit claims unexpectedly fell last week, the Labor Department said.

Ten- and 30-year yields climbed to 11-month highs on March 8 after the Labor Department reported U.S. employers added 236,000 jobs last month, beating a forecast of 165,000.

Fed Help

“The data has been overwhelmingly strong,” Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc., said March 11. “The Fed is obviously lowering rates and helping the economy, and that’s what’s going on.”

The Treasury auctioned $66 billion of notes and bonds this week. It sold $32 billion of three-year debt at a yield of 0.411 percent, $21 billion of 10-year securities at a yield of 2.029 percent and $13 billion of 30-year bonds at 3.248 percent.

Futures traders bet 10-year notes will fall. Hedge-fund managers and other large speculators reversed from a net-long position to a net-short position in 10-year note futures in the week ending March 12, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 57,346 contracts on the Chicago Board of Trade. Last week, traders were net-long 76,818 contracts.

Treasuries due in a decade or more are at the cheapest levels since 2011 relative to global peers with comparable maturities, according to Bank of America Merrill Lynch indexes. Yields on Treasuries reached 54 basis points higher this week than those in an index of other sovereign debt, the data showed. It was the most since August 2011.

China Holdings

China, the largest foreign lender to the U.S., increased its holdings in Treasuries in January by $44.1 billion, or 3.6 percent, the biggest boost since June 2011, the Treasury Department reported. The country owns $1.2645 trillion of the debt, the most since September 2011. As of January, China held 11.4 percent of outstanding marketable U.S. government debt.

Japan, the second-biggest foreign lender, raised its holdings of U.S. government debt by $4 billion to $1.1152 trillion, the first increase since October. Japan holds 10 percent of outstanding Treasury debt.

The Fed remains the largest holder of Treasuries, with a total of $1.767 trillion.

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