Treasuries in Longest Win Stretch Since April on Budget Turmoil

Treasuries rose for a third week, the longest winning streak since April, as demand for the safest assets increased amid speculation political deadlock over the U.S. budget may lead to a government shutdown.

Benchmark 10-year note yields touched a six-week low as the Senate approved a stopgap spending bill yesterday, three days before funding for the government runs out. The measure needs House approval, and Congress still must vote on raising the federal debt ceiling. Treasuries’ gains in September amid political turmoil and the Federal Reserve’s decision to refrain from reducing bond purchases have pared a loss for the quarter.

“We have the non-trivial risk of a government shutdown looming and the greater risk of coming to a reasonable negotiation on the debt ceiling that ultimately threatens growth and is supporting Treasuries,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union in New York. “The risks to economic growth may keep the Fed not tapering into 2014.”

Ten-year note yields dropped 11 basis points, or 0.11 percentage point, to 2.62 percent this week in New York, according to Bloomberg Bond Trader prices. They touched 2.60 percent, the lowest level since Aug. 12. The price of the 2.5 percent note maturing in August 2023 rose 30/32, or $9.38 per $1,000 face amount, to 98 29/32.

The benchmark yields climbed to a two-year high of 3.01 percent Sept. 6 amid bets the Fed would trim its bond-buying program. They fell after policy makers on Sept. 18 unexpectedly maintained their $85 billion in monthly bond-buying, saying they need more evidence of lasting improvement in the economy.

Bond Index

The Bloomberg U.S. Treasury Bond Index dropped 2.5 percent this year as of Sept. 26. It has returned 0.8 percent this month, leaving the quarter’s performance little changed. The Bloomberg Global Developed Sovereign Bond Index has gained 1.4 percent this month while losing 3.9 percent in 2013.

Treasury yields fell yesterday as the Senate voted 54-44 to finance the government through Nov. 15, putting pressure on the House to avoid a federal shutdown starting Oct. 1. The chamber stripped language to de-fund President Barack Obama’s signature health-care law. House Republicans insist the bill include limits on the law, a demand Democrats say they won’t accept.

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

Treasury Bills

U.S. bill rates declined amid the turmoil over the debt limit. The Treasury said it will sell $25 billion in three-month bills at its weekly auction Sept. 30, $5 billion less than the previous sale and the first drop 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.”

Rates on three-month Treasury bills touched negative 0.0101 percent yesterday, the lowest level this year, versus the 2013 average of 0.0482 percent. Rates on Treasury bills that mature Oct. 24 reached negative 0.010 yesterday, down from 0.035 percent Sept. 26, before ending the day at 0.0200.

Two years ago, one-month bills jumped to 0.18 percent on July 29, 2011, the highest since 2009, as Congress pushed to the Aug. 2, 2011, deadline set by Treasury to avoid a default.

Auction Demand

The Treasury auctioned $97 billion in two-, five- and seven-year notes this week. Demand at the five- and seven-year sales bounced back from the lowest levels in four years amid the Washington standoff and as investors bet the Fed will keep buying bonds to push down borrowing rates and spur growth.

“The Washington story gaining traction and the lack of taper have given the market strength,” said Carlos Pro, an interest-rate strategist at Credit Suisse Group AG in New York, which as a primary dealer is obligated to bid at U.S. debt sales. “The uncertainty that has been introduced as far as the outlook for monetary and fiscal policy has been a big driver in the return of demand for Treasuries, and that combo should keep us lower in yield.”

The Fed refrained after a meeting last week from slowing its purchases of Treasuries and mortgage bonds. Chairman Ben S. Bernanke said he was concerned that market interest rates, driven higher by his own suggestion earlier this year that he would scale back so-called quantitative easing, would curb growth. He also told reporters “conditions in the job market today are still far from what all of us would like to see.”

Jobs Report

U.S. employers added 180,000 jobs in September, economists in a Bloomberg survey forecast before the Labor Department reports the data on Oct. 4. August’s increase of 169,000 fell short of forecasts, and previous gains were revised lower than first calculated.

The Fed’s preferred measure of inflation showed slowing last month, according to data released yesterday. The personal consumption expenditure deflator rose 1.2 percent in August from a year earlier, compared with a revised 1.3 percent increase in July, the Commerce Department said.

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