Treasuries in Longest Rally Since January as Fed Retraces View

Treasuries rose for a third week as Federal Reserve meeting minutes convinced investors to dial back speculation the central bank was accelerating plans to raise interest rates.

The benchmark 10-year note’s winning streak was the longest since January amid revisions of projections established when Fed Chair Janet Yellen said March 19 the central bank may increase rates six months after it ends its bond-buying stimulus, which is forecast to conclude in October. U.S. 30-year bond yields fell to the lowest since July as a report on March wholesale inflation signaled the Fed has room to keep its interest-rate target at almost zero. The Treasury Department will sell $18 billion in five-year inflation-indexed bonds on April 17.

“Expectations of Fed rate hikes were pushed further out in time, which has been supported by low inflation and mixed economic data, even as the weather improves,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at United Nations Federal Credit Union in New York. “All together, the backdrop has been constructive for U.S. debt.”

Benchmark 10-year yields declined 10 basis points this week, or 0.10 percentage point, to 2.63 percent in New York, according to Bloomberg Bond Trader prices. The 2.75 percent note due in February 2024 rose 26/32, or $8.13 per $1,000 face amount, to 101 2/32. The yield reached 2.60 percent this week, the lowest level since March 4.

The 30-year bond yield dropped 10 basis points to 3.48 percent. It reached 3.47 percent, the least since July 3.

Trimmed Forecasts

Hedge-fund managers and other large speculators increased their net-long position in 30-year bond futures in the week ending April 8, according to U.S. Commodity Futures Trading Commission data. Bets that prices will rise outnumbered short positions by 12,787 contracts, a gain of 9,029 contracts from a week earlier.

Economists and strategists have reduced their projections for 10-year note yields for the second quarter to the lowest level since August and trimmed forecasts for the 30-year bond yield to the least since June.

Bloomberg News surveys conducted April 4 to 9 estimated the 10-year yield will end June at 2.95 percent, while the 30-year bond will yield 3.81 percent. Those estimates are down from 3 percent for the 10-year and 3.92 percent for the 30-year, according to a surveys conducted March 7 to 12.

“I’m surprised by how low rates got in this recent move,” said Dan Fuss, vice chairman at Loomis Sayles & Co. Vice Chairman in a radio interview yesterday with Kathleen Hays. “I’m among the many that thought yields were going to go 3.5 percent,” he said, referring to the 10-year note.

Bond Returns

The Bloomberg U.S. Treasury Bond Index has risen 0.5 percent this month and 2.3 percent this year as minutes of the Fed’s March 18-19 meeting played down forecasts by some central bankers that rates may rise faster than they had predicted. The minutes released on April 9 stated that several participants noted that the increase in the median projection overstated the shift in the projections.

The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. The central bank is in the process of unwinding the bond-purchase program it has used to help support the economy.

Futures prices put the likelihood the Fed will start raising rates in July 2015 at 61 percent yesterday, based on trading on the CME Group Inc.’s exchange. The chances for a raise increase in June 2015 fell to 41 percent, compared with 54 percent on April 4.

Speculative net-short position in two-year note futures in the week ending April 8 increased to 88,093 contracts, the most since the start of the financial crisis, according to CFTC data.

Fed Watching

“The Treasury marketplace has been trying to be bearish for well over a year and makes mountains out of Fed mole hills to have the information conform to a desire,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “Thus, there was a pile-on for the hike with thin evidence and a forced unwind with meatier information.”

Demand for Treasuries at this week’s three-year, 10-year and 30-year debt auctions was the highest since December. Bids for the $64 billion of fixed-rate securities equaled 2.99 times the amount of debt sold, the most demand since the same three maturities were sold four months earlier.

The increase in producer prices last month followed a 0.1 percent decrease in February, the Labor Department reported yesterday in Washington. The median estimate in a Bloomberg survey called for a 0.1 percent increase. Wholesale prices rose 1.4 percent in the past 12 months.

Inflation Reading

The Fed’s preferred gauge of inflation, known as the personal consumption expenditures deflator, has been below the central bank’s 2 percent goal since April 2012 and was at 0.9 percent in February from a year earlier.

A gauge of inflation expectations in the five years starting 2019, known as the five-year, five-year forward break-even rate, was at 2.38 percent on April 8, the least since March 21. The five-year average is 2.75 percent.

“Before we get a move higher in rates, there is a need for the economic backdrop to fundamentally support that outlook, and we haven’t seen that yet,” said William Marshall, an interest-rate strategist at Credit Suisse Group AG in New York, one of 22 primary dealers required to bid at Treasury debt sales.

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