Treasuries Rise Fifth Day as Low Inflation Eases Taper Concern

Treasury 10-year notes advanced for a fifth day, the longest streak of gains in almost a year, on speculation low inflation will give the Federal Reserve more flexibility in winding down its government bond-buying program.

Benchmark 10-year note yields approached the low for the month after a Labor Department report showed the consumer-price index increased 0.1 percent in August, the least in three months. The Fed will reduce its purchases of bonds, including Treasury Inflation Protected Securities, to $80 billion a month from $85 billion at its meeting tomorrow, according to a Bloomberg News survey of economists.

“Inflation is way too low versus where the Fed is targeting it,” said Ray Remy, head of fixed-income in New York at Daiwa Capital Markets America Inc., one of the 21 primary dealers that trade with the central bank. “It makes the case that tapering will be smaller, but it doesn’t take tapering off the table. The market is prepared for it and there’s no reason to go back based on all the groundwork they’ve laid.”

The U.S. 10-year yield fell two basis points, or 0.02 percentage point, to 2.85 percent at 5 p.m. in New York after falling to 2.78 percent yesterday, the lowest since Aug. 30. The 2.5 percent note due in August 2023 rose 5/32, or $1.56 per $1,000 face value, to 97. The five consecutive daily increases is the longest streak since the period ended Sept. 26, 2012.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 29 percent to $299 billion from $419.5 billion yesterday. This year’s average is $315.6 billion.

Tame Inflation

The CPI gained 0.2 percent in July. The median forecast in a Bloomberg survey of economists called for a 0.2 percent gain in August. The core measure, which excludes food and fuel, also rose 0.1 percent last month.

The yield on 0.375 percent TIPS due in July 2023 fell four basis points to 0.69 percent. The U.S. is scheduled to sell $13 billion of the securities in two days.

The difference between yields on 10-year notes and similar-maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, rose three basis points to 2.17 percentage points.

“The Fed is likely to mainly meet market expectations in terms of tapering its asset-purchase program,” said Christopher Sullivan, who oversees $2.25 billion as chief investment officer at the United Nations Federal Credit Union in New York. “We’re likely to see the curve steepen from here. It’s likely that we could see investors take advantage of any rally over the next couple of days to exit.”

Summers Rally

Treasuries rose yesterday on speculation the withdrawal of Lawrence Summers’s candidacy to be the next Fed chairman will make the central bank less aggressive in tapering stimulus.

Investors in Treasuries were long this week, betting that the prices of the securities will rise, according to a survey by JPMorgan Chase & Co.

The proportion of net longs was at 8 percentage points in the week ending yesterday, according to JPMorgan. Investors were net short by 8 percentage points in the week ending Sept. 9.

The percent of outright longs, or bets the securities will increase in value, rose to 21 percent, from 15 percent in the week ended Sept. 9. The percent of outright shorts dropped to 13 percent from 23 percent. Investors raised neutral bets to 66 percent from 62 percent, the survey reported.

U.S. government securities have fallen 3.6 percent this year through yesterday, according to the Bloomberg U.S. Treasury Bond Index. They returned 2 percent last year.

Foreign Demand

“A lot of bond investors are more than willing to wait on the sidelines and that brings in lower prices,” said Tom Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “They are assuming tapering will lead to higher rates. The question is ’what’s the Fed’s beginning of tapering going to look like?’”

Foreign holdings of Treasuries declined by $10.5 billion or 0.2 percent in July to $5.6 trillion, the first four-month drop since 2001, U.S. government data show. U.S. government securities held by overseas investors have dropped 2.3 percent since peaking at $5.72 trillion in March.

Holdings in China, the largest foreign creditor to the U.S., increased by $1.5 billion or 0.1 percent in July to $1.277 trillion. The Treasury has changed the way it collects data on foreign holdings of U.S. government securities to reflect custodial data and will no longer make revisions to the previous month’s figures.

China’s Treasury position has risen $56.9 billion or 4.7 percent this year after a 5.9 percent increase in 2012. The holdings declined 0.7 percent to $1.152 trillion in 2011, the first annual decline on record going back to 2001.

Capital Inflow

Treasuries held by Japanese investors, who have the second largest stake in U.S. government debt, rose for the first time in four months by $52 billion or 4.8 percent to a record $1.135 trillion. It was the largest increase since November 2011 following Japanese currency interventions earlier that year. Japan’s holdings of U.S. government debt have dropped 4.3 percent since peaking at $1.132 trillion in October.

Net purchasing of long-term Treasuries by private foreign investors was $49.8 billion compared with selling of a net $40.1 billion the prior month, the department said. Including short-term securities such as Treasury bills and stock swaps, the total cross-border inflow was $56.7 billion in July, compared with a $19.7 billion outflow the previous month, the report showed.

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