Treasury Volatility Slump Raises Concern Rally FadingWes Goodman
Treasury volatility dropped to a record low and prices were little changed for a third week, raising concern a rally is losing momentum as analysts forecast a report today will show economic growth picked up.
Bank of America Merrill Lynch’s MOVE index measuring price swings fell to 49.39 basis points yesterday in the U.S., extending its decline to all-time lows. 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 News.
“Yields are too low,” said Roger Bridges, who helps oversee the equivalent of $23.7 billion as head of fixed income in Sydney at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. “The U.S. is in a lot better shape.” Bridges said he sold Treasury futures contracts earlier in April as bonds rallied.
Benchmark 10-year rates declined one basis point to 1.69 percent as of 7:21 a.m. in London, according to Bloomberg Bond Trader data. The price of the 2 percent note due in February 2023 rose 1/8, or $1.25 per $1,000 face amount, to 102 3/4. The rate was little changed from three weeks ago on April 5.
Treasuries eked out a gain late in Asia trading as Japanese stocks fell after the nation’s central bank maintained its plan to double the monetary base in two years, while stopping short of announcing new measures. The Nikkei 225 Stock Average slid 0.3 percent.
Treasury returns are little changed since April 5, Bank of America Merrill Lynch indexes show. U.S. government securities gained 1.8 percent in the preceding two-month period.
Japan’s 10-year rate advanced 1 basis point to 0.59 percent today. A basis point is 0.01 percentage point. The nation’s government bond market has fallen 0.5 percent this month.
While there are signs of a slowdown in growth, including employment and manufacturing that expanded less in March than analysts predicted, the economy is still stronger than a year ago.
GDP growth of 3 percent would compare to 2 percent in the first three months of 2012. The jobless rate fell to 7.6 percent in March from 8.2 percent 12 months earlier.
Applications for U.S. unemployment benefits fell to a six-week low, a sign the labor market is improving after a setback last month. First-time jobless claims decreased a larger-than-forecast 16,000 in the week ended April 20 to 339,000, Labor Department data showed yesterday.
The Federal Reserve is buying $45 billion of Treasuries and $40 billion of mortgage-backed securities a month to spur the economy by putting downward pressure on borrowing costs. The purchases have damped volatility, Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of the 21 primary dealers that are obligated to bid U.S. debt sales, said yesterday in New York.
Nomura Holdings Inc., another primary dealer, is betting the difference between 5- and 10-year yields will increase. The so-called spread was 1 percentage point, shrinking from this year’s high of 1.16 percentage points in March.
The difference may widen as investors demand higher 10-year rates before the government holds an auction of the securities on May 8, George Goncalves and Jeffrey Young, strategists for Nomura in New York, wrote in a report yesterday. The U.S. is also scheduled to sell 3-year notes May 7 and 30-year bonds May 9. It plans to announce the auction sizes May 1.
The decline in yields this month curbed demand from Japanese investors, according to Nomura. The Bank of Japan’s decision April 4 to expand monetary easing will encourage the nation’s money managers to seek overseas bonds, Goncalves said earlier in April.
“There are still no concrete signs of Japanese flows” in large amounts, the report yesterday said.
Ten-year yields dropped to 1.64 percent this week, approaching the record low of 1.38 percent.
Mizuho Asset Management Co. trimmed its Treasury holdings in April as bonds rallied, said Akira Takei, the head of the company’s international fixed-income department in Tokyo.
“The respite in the bond market might persist for another month,” said Takei, who helps invest the equivalent of $32 billion at the unit of Japan’s third-biggest publicly traded bank.