Treasury 10-Year Notes Erase Losses on Fed Buying Signal

Treasury 10-year notes rallied to finish little changed as weaker-than-forecast economic data dashed speculation the Federal Reserve might end stimulus measures anytime soon, driving investors into government debt.

Benchmark 10-year yields rose early in the week as the Treasury sold $66 billion in notes and bonds before paring gains as separate reports showed measures of wholesale prices, consumer sentiment and retail sales in the U.S. all missed forecasts. Large speculators raised their net-long positions on the securities’ futures to the highest level this year. The Fed will provide a look at U.S. economic growth when it releases its Beige Book report on April 17.

“We saw a tale of two markets, where supply saw a bit of a selloff that was quickly reversed with worse data hitting the market,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed income assets. “We are locked in a low-rate regime for some time as central banks are still easing aggressively.”

Benchmark 10-year yields were little changed at 1.72 percent in New York this week, according to Bloomberg Bond Trader data. The price of the 2 percent note maturing February 2023 rose was 102 1/2. Yields on 30-year bonds rose four basis points, or 0.04 percentage point, to 2.92 percent.

Widening Curve

The yield curve, the spread between 10- and 30-year bonds widened 0.35 percentage points, or 3.5 basis points to 1.20 on the week, the most since the week ending on November 11, 2012.

“The widening of the curve is a result of Japanese buying in the intermediate sector,” LeBas said.

Bank of Japan Governor Haruhiko Kuroda said on April 4 the central bank would double its asset purchases, to 7.5 trillion yen ($76 billion) of bonds a month, in a bid to encourage inflation. Japan held $1.12 trillion of U.S. debt, Treasury data through January shows.

Treasuries fell on April 10 as the minutes from the Fed’s March 19-20 meeting showed that some Federal Open Market Committee members said the central bank should begin tapering its quantitative-easing program later this year and stop it by year end.

The committee, led by Chairman Ben S. Bernanke, decided at the gathering to press on with $85 billion in monthly bond buying until the labor-market outlook has “improved substantially.”

‘Unchartered Territory’

“As long as the big boys on the block are buying, it’s going to be hard for asset prices to go down,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “We are in unchartered territory. When data worsens, all assets rally because it just means the Fed will stay the course, and that means stocks and bonds can rally.”

The Standard & Poor’s 500 Index rose to a record, gaining

2.3 percent to 1,588.86 this week after touching a record 1,597.35.

Ten-year yields will be 2.25 percent by Dec. 31, according to banks and securities companies surveyed by Bloomberg News, down from 2.32 percent projected in February.

Speculative long positions on the benchmark note, or bets prices will rise, outnumbered short positions by 120,779 contracts on the Chicago Board of Trade, the most since Dec. 17. Net-long positions rose by 10,087 contracts, or 9 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

Boosting Duration

Bond-fund managers are retreating from the most defensive bets in more than four years on U.S. debt investments as a sudden slowdown in job creation mutes the risk of a rise in interest rates.

Fixed-income money managers overseeing a combined $130 billion have increased their asset-weighted duration, a reflection of how long the debt they own will be outstanding, to

98.6 percent of target benchmark indexes as of April 9 from 97.2 percent on March 19, the least since September 2008, according to a survey by Stone & McCarthy Research Associates in Plainsboro, New Jersey.

“The economic data is pointing to a weak and weakening economy, which continues to keep a bid in Treasuries,” said Scott Graham, head of government-bond trading at Bank of Montreal’s BMO Capital Markets unit in Chicago, one of 21 primary dealers that trade with the Fed. “With such aggressive global central-bank action, the onus is squarely on good data to get the market to higher yields, and we just haven’t seen that yet.”

‘Ugly Numbers’

The 0.4 percent decrease in retail sales, the biggest since June, followed a 1 percent gain in February, Commerce Department figures showed yesterday in Washington, as the median forecast of 85 economists surveyed by Bloomberg called for an unchanged reading.

A separate report showed the producer price index dropped

0.6 percent, the biggest since May, following a 0.7 percent gain in the prior month. A Bloomberg survey called for a 0.2 percent decline. The Thomson Reuters/University of Michigan preliminary sentiment index for April fell to 72.3 from 78.6 in March, with a survey projecting no change from the prior month.

“Those are pretty ugly numbers,” Ira Jersey, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG. “In an environment where you have very slow jobs growth and poor sales, the two of those things don’t bode well for the economy. An early reduction in quantitative easing is further off the table because of these numbers.”

The U.S. sold $13 billion of 30-year bonds on April 11, at a yield of 2.998. They sold $21 billion of 10-year debt the day before at a yield of 1.795 percent and auctioned $32 billion of three-year notes on April 9 at a yield of 0.342 percent.

The sales will raise $6.7 billion of new cash, as maturing securities held by the public total $59.3 billion, according to the Treasury.

The U.S. will auction $18 billion in five-year inflation-indexed notes on April 18.

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