Treasuries Rally Most in Nine Months on Slowing Growth

Treasuries are rallying by the most in nine months as signs of slowing growth lead Federal Reserve officials to examine the need to increase the bond-purchase program they use to support the economy.

U.S. government securities have returned 1 percent this month, which is the most since July. The MSCI All-Country World Index of stocks gained about the same amount after accounting for reinvested dividends, while the Standard & Poor’s GSCI Index of commodities tumbled 6 percent. The U.S. is scheduled to sell $29 billion of seven-year notes today.

Benchmark 10-year yields were little changed at 1.71 percent at 6:48 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2023 was 102 5/8. The rate touched 1.64 percent this week, approaching the record low of 1.38 percent set in July.

“The economy is still in a recovery,” said Park Sungjin, head of asset management in Seoul at Meritz Securities Co., which oversees $7 billion. “The speed is less than expected. The Fed will continue the easing policy. Yields will stay low.” Park said he dropped a bet in March that rates would rise and prices would fall.

Japan’s 10-year yield slid one basis point, or 0.01 percentage point, to 0.58 percent today. The nation’s debt market has declined 0.5 percent in April, the Bank of America data show.

Fed Stimulus

The Fed is buying $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs, a policy known as quantitative easing.

At their meeting last month, several members of the Federal Open Market Committee advocated slowing purchases and stopping them by year-end. Since then, seven have voiced support for maintaining the current pace, including five who vote on the policy making panel: Governor Daniel Tarullo, New York Fed President William C. Dudley, James Bullard of St. Louis, Chicago’s Charles Evans and Boston’s Eric Rosengren.

“More needs to be done,” Dudley said April 22.

Bullard said April 17 that inflation has fallen too far below the Fed’s 2 percent goal, and a further decline could prompt increased asset purchases.

Consumer prices rose 1.3 percent in February from a year earlier, according to the Fed’s preferred gauge of costs in the economy, less than the central bank’s 2 percent goal.

The seven-year sale today follows $35 billion auctions of five-year notes yesterday and two-year securities April 23.

Slowing Bids

Bidding has slowed at Treasury auctions this year, with the $702 billion in debt sales attracting an average of $2.98 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, data released by the Treasury and compiled by Bloomberg show.

The decline in government rates is driving a hunt for assets outside the sovereign debt market.

The premium investors demand to hold high-yield, high-risk bonds instead of Treasuries narrowed to 4.67 percentage points yesterday, the least since November 2007, the Bank of America Merrill Lynch data show.

A survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc showed 23 percent said they own shares or plan to buy them.

U.S. employment and manufacturing expanded less in March than economists surveyed by Bloomberg News forecast, while retail sales and durable goods orders dropped.

GDP Report

Gross domestic product expanded at a 3 percent rate in the first quarter, after growing 0.4 percent in the final three months of 2012, according to the median forecast of economists surveyed by Bloomberg before the department issues the figure tomorrow. A weekly government report today may show initial claims for jobless insurance was little changed at 350,000, based on responses from economists.

“The second quarter will be weaker than the first,” said Genzo Kimura, a Tokyo-based investor at Sumitomo Mitsui Trust Asset Management Co., which oversees the equivalent of $42.3 billion. “The U.S. economy is not doing well.” An end to the Fed bond purchases is “far away,” he said.

Kimura said he purchased 30-year bonds several times in April and may buy more if their yields rise. The securities have returned 4.7 percent this month, Bank of America indexes show.

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