Treasury Yields Fall to Lowest in Week on Bets Fed Keeps Buying

Treasury 10-year note yields fell to the lowest level in more than a week on speculation the Federal Reserve will maintain its bond-buying program into next year after the government shutdown weighed on economic growth.

U.S. debt advanced for a second day as consumer confidence dropped to a two-year low and a regional factory gauge fell in October. Treasury bill rates dropped for a second day after lawmakers agreed on a plan to end the federal closure that started Oct. 1 and to raise the borrowing limit, avoiding a default and pushing the budget battle into early next year.

“The market is turning back to looking at the Fed,” said Donald Ellenberger, who oversees about $10 billion as co-head of government and mortgage-backed securities at Federated Investors in Pittsburgh. “The uncertainty in the market and the economy may keep the Fed on hold longer than anticipated, which is supportive of Treasury prices.”

The benchmark 10-year yield fell five basis points, or 0.05 percentage point, to 2.62 percent at 10:09 a.m. New York time today, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 13/32, or $4.06 per $1,000 face amount, to 98 31/32. Yields dropped six basis points yesterday, the biggest decline since Sept. 18.

Treasuries have lost investors 2.5 percent this year, according to Bloomberg US Treasury Bond Index. The Bloomberg Global Developed Sovereign Bond Index has lost investors 3.71 percent in 2013.

Record Low

The seven-day relative strength index for the Treasury 10-year note yield was at 42 today, down from 47 yesterday and 70 on Oct. 15, according to Bloomberg data. A reading lower than 30 or above 70 suggests the security may be poised for a change in direction.

While the yield has advanced from a record low of 1.379 percent in July 2012, it’s below the average of about 6.40 percent since September 1981, the start of the three-decade bull market in bonds.

President Barack Obama just after midnight signed into law a measure to extend the nation’s borrowing authority into early 2014 and end the shutdown.

The deal, which avoided a default of the world’s biggest economy and means that federal workers return to their jobs today, funds the government at Republican-backed spending levels through Jan. 15, 2014, and suspends the debt limit through Feb. 7.

Slowing Purchases

“There’s one theme out there -- it’s overwhelmingly negative for the economy and positive for the Fed not tapering, which people are equating to higher Treasury prices,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc.

In September, most Fed policy makers said the central bank will probably reduce bond purchases -- used to support the economy by putting downward pressure on borrowing costs -- this year from the current rate of $85 billion a month.

Policy makers including Fed Bank of Kansas City President Esther George are due to speak today.

“Most participants viewed their economic projections as broadly consistent with a slowing in the pace of the committee’s purchases of longer-term securities this year and the completion of the program in mid-2014,” according to the record of the Federal Open Market Committee’s Sept. 17-18 gathering.

Economic ‘Disruption’

“Because of the disruption, because of the uncertainty, what’s likely to happen is a slower pace of tapering by the Fed,” said Russ Koesterich, chief investment strategist at BlackRock Inc., the world’s largest money manager with $4.1 trillion in assets. Falling consumer confidence will depress gross domestic product growth in the fourth quarter, New York-based Koesterich said on Bloomberg Television’s “First Up” with Susan Li.

The monthly Bloomberg Consumer Confidence Index expectations gauge plunged to minus 31, the lowest level since November 2011, from minus 9 in September, a report showed today. The share of people projecting the economy will worsen jumped by the most since the collapse of Lehman Brothers Holdings Inc. five years ago.

The Federal Reserve Bank of Philadelphia’s general economic index fell to 19.8 this month from 22.3 in September. Readings greater than zero signal growth in the area, which covers eastern Pennsylvania, southern New Jersey and Delaware. The median forecast of 56 economists surveyed by Bloomberg called for a reading of 15.

Rates Drop

Rates on $120 billion of bills maturing today, when U.S. borrowing authority was scheduled to lapse, dropped to 0.038 percent yesterday. They were as high as 0.51 percent Oct. 10.

The next securities due are $93 billion of debt maturing on Oct. 24. Rates on those bills touched 0.68 percent yesterday before dropping to 0.01 percent today. The rate was negative as recently as Sept. 27.

One-month rates were 12 basis points lower at 0.02 percent after touching 0.45 percent yesterday, the highest level since October 2008, according to data compiled by Bloomberg. The rate on bills due on Feb. 13 dropped three basis points to 0.06 percent, compared with an average of 0.035 percent since the securities were issued in August.

Even at the height of concern about a default, yields remained lower than historical levels, with one-month rates averaging 1.5 percent in the past 10 years. During that time they climbed to a high of 5.26 percent in November 2006 and fell to as low as negative 0.09 percent in December 2008.

The U.S. is scheduled to announce today the size of a 30-year auction of Treasury Inflation Protected Securities set for Oct. 24. It will be $7 billion, according to economic advisory company Stone & McCarthy Research Associates.

Ratings Impact

The shutdown has shaved at least 0.6 percent from annualized fourth-quarter growth, Standard & Poor’s said yesterday. The ratings agency downgraded the U.S. on Aug. 5, 2011, by one step to AA+ from AAA.

China’s Dagong Global Credit Rating, one of the country’s four biggest credit-rating companies, downgraded the local- and foreign-currency credit ratings of the U.S. to A- from A today, maintaining a negative outlook, it said in an e-mailed statement today.

China is the largest foreign holder of U.S. Treasuries and increased its holdings to $1.28 trillion as of July, according to U.S. government figures.

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