U.S. Yields Trade at Almost 1-Month Low as CPI Pace Spurs Demand

Treasuries rose after government reports showed an increase in continuing unemployment claims and inflation that remains below the Federal Reserve’s target as the central bank begins cuts to its unprecedented debt purchases.

Benchmark 10-year yields fell to almost a one-month low as Labor Department reports showed the consumer price index rose 1.5 percent in the past year, below the Fed’s 2 percent target, while the number of people continuing to receive jobless benefits jumped to the highest since July. China and Japan boosted holdings of Treasuries to a record high in November, data released on the Treasury Department’s website showed.

“There’s clearly demand for Treasuries,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “Inflation numbers don’t seem to be an issue at this point. There’s still some concern on the Fed’s part with respect to inflation, but I don’t think that will affect tapering.”

The 10-year yield fell five basis points, or 0.05 percentage point, to 2.84 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent note due in November 2023 rose 13/32, or $4.06 per $1,000 face amount, to 99 7/32. The yield reached 2.82 percent on Jan. 13, the least since Dec. 11.

The yield has climbed from last year’s low of 1.61 percent set in May, though is still below its decade-long average of 3.48 percent.

Bond Returns

Treasuries handed investors a loss of 2.5 percent in the 12 months through yesterday, while TIPS dropped 8 percent, indexes compiled by Bank of America Merrill Lynch show.

Treasury trading volume at ICAP Plc, the largest inter-dealer broker of U.S. government debt, dropped to $268.4 billion from $354 billion yesterday. The average this year is $291.9 billion.

China boosted its holdings of Treasuries by $12.2 billion to a record $1.317 trillion in November, while Japan’s holdings rose $12 billion to $1.186 trillion, also a record, data released on the Treasury Department’s website showed. The figures, originally scheduled for release later today in Washington, were inadvertently posted on the Treasury’s website.

Fed Bank of Chicago President Charles Evans said yesterday low inflation shows “extraordinary” monetary policy measures are needed to support the economy.

Fed Policy

The central bank’s reduction in bond purchases should be seen as a shift in emphasis toward keeping the benchmark interest rate at almost zero for a longer period, he said. The Fed decided last month to trim its monthly bond purchases to $75 billion from $85 billion.

Traders are pricing in a 24 percent probability that the central bank raises its benchmark rate by its January 2015 meeting, up from 22.9 percent on Jan. 10. The Fed has kept its target for overnight loans between banks in a range of zero to 0.25 percent for five years.

Treasury Secretary Jacob J. Lew said Congress should raise the federal debt ceiling as soon as possible and assume that the extraordinary measures used to stay under the limit will run out in late February. President Barack Obama signed legislation last year to suspend the limit until Feb. 7 and end a 16-day partial government shutdown.

“We get into a kind of Washington parlor sport of trying to figure out the precise moment when is the last minute” to raise or suspend the debt limit, Lew said at an event in Washington hosted by the Council on Foreign Relations. “The buildup to the last minute causes damage.”

Debt Limit

Senate Majority Leader Harry Reid said it’s “not urgent” for Congress to raise the debt limit, though an aide later said Reid is committed to boosting the ceiling well before the U.S. runs out of borrowing authority.

Continuing jobless claims jumped by 174,000 to 3.03 million in the week ended Jan. 4, reflecting uneven. Meanwhile, jobless claims decreased by 2,000 to 326,000 in the week ended Jan. 11, the least since the end of November, from a revised 328,000 in the prior period, a Labor Department report showed today in Washington.

The 0.3 percent CPI gain was the biggest since June and followed no change the prior month, a Labor Department report showed in Washington. It matched the median forecast of 87 economists surveyed by Bloomberg.

“Consumer inflation continues to be a non-issue,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $11 billion in fixed-income assets. “There’s no evidence inflation is decelerating, which is a good sign.”

Price Levels

Producer prices had the smallest annual increase in 2013 in five years, the Labor Department said yesterday. The 1.2 percent advance for the calendar year was the smallest since 2008, during the recession that began in December 2007.

The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, was 2.24 percentage points, the lowest level on a closing basis since Dec. 31.

The Treasury announced it will sell $15 billion of 10-year TIPS at its auction Jan. 23. The previous auction of the securities on Nov. 21 was for $13 billion.

Before it's here, it's on the Bloomberg Terminal.