Treasuries Climb as Slower Economic Growth Lifts Safety Appeal

The Treasury 10-year note yield fell to the lowest level this year as a government report showing the economy grew at a slower pace than forecast in the first three months boosted demand for the safest assets.

Benchmark yields dropped for a second week as bidding increased at three offerings of Treasury notes totaling $99 billion as economic data continued to suggest the pace of economic growth is slowing. The Federal Reserve meets to discuss monetary policy April 30-May 1, while the Labor Department will say May 2 that the economy added 150,000 jobs in April, according to the median forecast in a Bloomberg News survey.

“You’re seeing some modest gains based upon the notion that the economy is slowing,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. Expectations from the Fed for weaker data may “keep the current program going longer than was originally thought a couple of months ago,” he said.

The 10-year note yield fell four basis points, or 0.04 percentage point, to 1.66 percent this week in New York, according to Bloomberg Bond Trader data. It touched 1.64 percent on April 23, the lowest level since Dec. 12. The price of the 2 percent note maturing in February 2023 rose 3/8, or $3.75 per $1,000 face value, to 103 1/32.

Yields on the 30-year bond fell two basis points to 2.86 percent on the week.

Demand Rises

Demand at the Treasury’s sales of $35 billion of two-year notes, $35 billion of five-year debt and $29 billion of seven-year securities was the highest in at least three months. The securities sold at the lowest yields of the year.

Even with the recent pickup, bidding at Treasury auctions this year has slowed versus 2012, with the $721 billion in debt sales attracting an average of $3.01 in orders to buy per dollar of debt sold, compared with a record $3.15 the previous year, data released by the Treasury and compiled by Bloomberg show.

“You need to see the economy really starting to do well before you really start getting comfortable,” said Douglas Swanson, co-manager of a $29 billion fund at JPMorgan Chase & Co.’s J.P. Morgan Asset Management. As for the Fed, “even though there’s been a lot of talk about tapering, you still feel that’s not going to happen too early. With the economic numbers that have come out more recently, that’s a lot less likely to happen this year.”

‘Aggressive Bernanke’

Fed policy makers including Chairman Ben S. Bernanke have said they’ll maintain their $85 billion of monthly Treasury and mortgage debt buying until the labor market improves “significantly.” Minutes of their March meeting showed they discussed slowing the pace of purchases this year.

“Bernanke has been pretty consistent and he’s being more aggressive than the market anticipates,” said Swanson, who manages the JPMorgan Core Bond Fund.

Gross domestic product rose at a 2.5 percent annual rate, lower than forecast, after a 0.4 percent fourth-quarter advance, Commerce Department figures showed today in Washington. The median estimate of 86 economists surveyed by Bloomberg called for a 3 percent gain. Consumer spending, the biggest part of the economy, climbed by the most since the fourth quarter of 2010.

The Thomson Reuters/University of Michigan final April index of consumer sentiment declined to 76.4 from 78.6 in March. Economists projected 73.5 for the gauge after a preliminary April reading of 72.3, according to the mediate estimate in a Bloomberg survey.

Biggest Drop

In falling to yesterday’s low of 1.66 percent, the yield has had its biggest drop since the period from April 27 to June 1, 2012, when it slid 0.48 percentage point to a then record-low 1.45 percent as Europe’s debt crisis worsened.

Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index fell for a fourth day to a record low on April 25, reaching 49.39 basis points yesterday, below the low of 49.75 basis points reached April 24, as the Fed supports the market with asset buying. The data, which measures price swings, stretches back to 1988.

“Investors aren’t convinced there’s any reason to meaningfully sell off Treasuries at the moment,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “Growth remains less than desirable.”

Hedge-fund managers and other large speculators reversed from a net-short position to a net-long position in 30-year bond futures in the week ending April 23, according to U.S. Commodity Futures Trading Commission data.

Long Bets

Speculative long positions, or bets prices will rise, outnumbered short positions by 1,337 contracts on the Chicago Board of Trade, the most in 2013. Last week, traders were net-short 8,968 contracts.

In 10-year note futures, speculative long positions outnumbered short positions by 120,640 contracts, according to CFTC data. Net-long positions fell by 14,732 contracts, or 11 percent, from a week earlier, according to the data.

The bond market has become more pessimistic on the economy in the last six weeks. On March 11, the 10-year Treasury yield closed at 2.06 percent, its high for the year, up from 1.76 percent at the end of 2012.

Before it's here, it's on the Bloomberg Terminal.