Treasuries Add to Third Weekly Gain on Shutdown Outlook

Treasuries gained for a third week as demand for the safest assets swelled amid speculation a political standoff over the U.S. budget may lead to a government shutdown.

Benchmark 10-year notes had their longest weekly winning streak since April as the U.S. Senate approved a stopgap spending bill and sent it to the House three days before funding for the government runs out. Congress must also vote on raising the federal debt limit, which Treasury Secretary Jack Lew has said will be reached by Oct. 17. Inflation slowed last month, the Federal Reserve’s preferred measure of prices showed today.

“The conflict is perceived to weigh heavily on the economy,” said David Coard, head of fixed-income trading in New York at Williams Capital Group LP, a brokerage for institutional investors. “It produces a flight-to-quality bid. The only thing to lift yields out of the current dive is signs of strength in the data.”

The 10-year yield dropped three basis points, or 0.03 percentage point, to 2.62 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. The yield touched 2.60 percent, the lowest level since Aug. 12, and fell 11 basis points on the week. The price of the 2.5 percent note maturing in August 2023 increased 7/32, or $2.19 per $1,000 face amount, to 98 29/32.

The benchmark yield climbed to 3.01 percent on Sept. 6 amid expectations the Fed would trim its bond-buying program and then fell after policy makers on Sept. 18 unexpectedly maintained the purchases. The yield increased two basis points yesterday.

Futures Bets

Hedge-fund managers and other large speculators trimmed their net-short position in 10-year note futures in the week ended Sept. 24, according to U.S. Commodity Futures Trading Commission data.

Speculative short positions, or bets prices will fall, outnumbered long positions by 89,107 contracts on the Chicago Board of Trade, compared with net short positions the previous week of 126,026, the most bearish since May 2012. Net-short positions fell by 36,919 contracts, or 29 percent, from a week earlier, the Washington-based commission said in its Commitments of Traders report.

The seven-day relative strength index for the U.S. 10-year note yield fell to 28. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

The Bloomberg U.S. Treasury Bond Index dropped 2.5 percent this year through yesterday and returned 0.8 percent this month. The Bloomberg Global Developed Sovereign Bond Index has gained 1.4 percent this month and has slid 3.9 percent in 2013.

Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE index rose to 78, above the 2013 average of 71.89. It climbed Sept. 5 to 114.2, the highest in two months.

Volume Falls

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped 16 percent to $277 billion, from $329 billion yesterday. The average this year is $316 billion.

The Senate voted 54-44 today to finance the government through Nov. 15, putting pressure on the House to avoid a federal shutdown set to start Oct. 1. The Senate stripped language backed by Republicans to de-fund President Barack Obama’s signature health-care law.

“Until we get a resolution from Congress, we will see the safe-haven bid continue,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed income assets.

A three- to four-week U.S. government shutdown would cut growth by 1.4 percentage points, Moody’s Analytics Inc. estimated.

Bill Rates

U.S. bill rates declined amid the turmoil over the budget and the debt ceiling. The Treasury Department said yesterday it will sell $25 billion in three-month bills at its weekly auction on Sept. 30, $5 billion less than the previous offering and the first reduction in issuance since April.

“The Treasury cutting the size of the three-month auction is a signal that the debt ceiling is starting to have an impact on supply, inspiring demand from investors who are trying to get out in front of the possibility of a shrinking pie,” said Thomas Simons, a government-debt economist in New York at Jefferies LLC, one of 21 primary dealers that trade with the Fed. “We could see a further supply squeeze if the fiscal issues don’t get resolved.”

Bill Rates

Rates on three-month Treasury bills touched negative 0.0101 percent today, the lowest level this year, before trading at 0.0152 percent. The 2013 average is 0.0482 percent.

Rates on bills that mature Oct. 24 reached negative 0.010 today, down from 0.035 percent yesterday, before trading at 0.020 percent. Two years ago, one-month bills jumped to 0.18 percent on July 29, 2011, the highest since February 2009, as Congress pushed to the Aug. 2, 2011, deadline set by Treasury to avoid a default.

Treasuries remained higher today as a report showed inflation slowed. The personal consumption expenditure deflator, the Fed’s preferred gauge, rose 1.2 percent in August from a year earlier, compared with a revised 1.3 percent increase in July, the Commerce Department reported.

“They want inflation of 2 percent before they taper,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “They are worried about deflation.”

The gap between yields on 10-year notes and comparable Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, decreased two basis points to 2.18 percentage points, after touching 2.27 percentage points on Sept. 23, the widest since Aug. 13.

Fed Purchases

The Fed buys $85 billion a month of Treasuries and mortgage bonds to put pressure on borrowing costs and spur economic growth. It purchased $5.55 billion today in U.S. debt maturing between June 2018 and May 2019 as part of the program.

Chicago Fed Bank President Charles Evans, who has been among the central bank’s most vocal proponents of record stimulus, said more signs of strength in the economy are needed to reduce asset purchases. He spoke to reports in Oslo.

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