Treasuries Gain as Economic Concern Cools Fed Speculation

Treasuries rose, pushing yields lower for a second day, as investors weighed prospects for Federal Reserve stimulus at a meeting next week and economic data from Europe and Japan damped growth optimism.

Ten-year yields slid to a one-week low after rising last week to the highest since July 2011 on concern the Fed may slow purchases. The surge reversed after data on Sept. 6 showed lower-than-forecast job gains in August. Thirty-year bond yields reached a one-week low before the U.S. sells $13 billion of the debt today. Euro-area industrial production shrank more than forecast in July and Japanese machinery orders stagnated.

“The rise in yields was based on whatever tapering the Fed is going to do -- people feel we’ve priced that into the market,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “These are levels to buy rather than to sell.”

The benchmark 10-year yield fell four basis points, or 0.04 percentage point, to 2.87 percent at 12:11 p.m. New York time, according to Bloomberg Bond Trader prices. It touched 2.86 percent, the least since Sept. 4. The price of the 2.5 percent security due in August 2023 gained 11/32, or $3.44 per $1,000 face amount, to 96 26/32.

Thirty-year bond yields dropped four basis points to 3.81 percent, the lowest level since Sept. 5.

Bond Auction

The 30-year bonds being sold today yielded 3.82 percent in pre-auction trading, compared with 3.652 percent on Aug. 8 at the last sale. Investors bid for 2.11 times the amount of debt offered last month, the least in two years.

Long bonds auctioned in July drew a yield of 3.660 percent, the highest since August 2011.

Treasuries rallied yesterday as the government’s $21 billion auction of 10-year notes drew bids valued at 2.86 times the amount offered, the most since March. The yield at the sale was the highest since June 2011.

The government said it will auction $13 billion in 10-year Treasury Inflation Protected Securities on Sept. 19. It sold $15 billion of the 10-year debt on July 18 at a high yield of 0.384 percent, the first positive yield for the securities since November 2011.

Treasuries also rose yesterday on bets that Verizon Communications Inc.’s record $49 billion bond sale would lead to the unwinding of hedges used to guard against higher yields. As companies sell debt, they enter into rate-lock agreements, in which they bet on Treasury prices falling to guard against higher yields. Once the debt is sold, they end the wagers.

‘Very Deep’

The Verizon sale “was positive in that it shows that the market remains very deep,” said Michael Leister, a senior rates strategist at Commerzbank AG in London. “That they were able to place such a huge amount without a major hiccup is a positive sign of the market’s absorption capacity,” he said.

Ten-year note yields will end the year at 2.85 percent and increase to 3.1 percent by June 2014, according to the median forecast of economists in a Bloomberg News survey released today.

U.S. government bonds have lost 0.5 percent since the end of August, set for a fifth monthly decline, the longest since a seven-month slump ended March 2011, according to the Bloomberg U.S. Treasury Bond Index.

The Standard & Poor’s 500 Index of U.S. shares has returned 3.5 percent this month, including reinvested dividends.

The Federal Open Market Committee will decide at its Sept. 17-18 meeting to reduce monthly purchases of Treasuries to $35 billion from $45 billion, according to the median of 34 responses in a Bloomberg survey of economists. Policy makers will maintain mortgage-bond buying at $40 billion under the central bank’s quantitative-easing program, the survey shows.

Fed Purchase

The Fed bought $3.36 billion today of Treasuries due from August 2021 to August 2023 as part of the stimulus program.

The central bank has maintained the benchmark federal-funds rate target at a record-low range of zero to 0.25 percent since December 2008. It forecast in June that the unemployment rate may fall to as low as 6.5 percent next year, from 7.3 percent in August. Inflation, as measured by the price index for personal consumption expenditures, may advance to 2 percent in 2014 from 1.4 percent in July, according to the central bank’s projections.

Yields briefly cut their decline today after initial claims for unemployment benefits in the U.S. unexpectedly dropped to the lowest level since April 2006 as two states upgraded computer systems.

Upgrades’ Role

Claims fell by 31,000 to 292,000 in the week ended Sept. 7, which also included the Labor Day holiday, according to Labor Department data released today in Washington. The median forecast in a Bloomberg survey called for an increase to 330,000 applications. An agency spokesman said that the computer upgrades played a major role in the drop in claims.

Factory production in the euro region fell 1.5 percent from June, when it gained 0.6 percent, the European Union’s statistics office said today. That’s more than the 0.3 percent contraction forecast by economists, according to the median of 33 estimates in a Bloomberg survey.

Japanese machinery orders were unchanged in July from the previous month when they fell 2.7 percent, the Cabinet Office said in Tokyo. Economists in a Bloomberg survey predicted an increase of 2.4 percent.

A report tomorrow is forecast to show U.S. retail sales rose 0.5 percent in August, up from 0.2 percent the previous month. Sales growth has averaged 0.34 percent a month this year.

“We had IP numbers that were not so pleasant out of Europe,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Now we have to wait for Europe a little bit, and that makes tomorrow’s retail numbers very important as well.”