Treasuries Poised for Strongest Month Since January as Fed Meets

Treasuries were poised for the best month since January as the Federal Reserve started a two-day meeting, with economists forecasting policy makers will scale back their monthly debt-buying program.

U.S. debt was little changed today as the central bank is forecast to cut its monthly purchases to $45 billion from $55 billion when its meeting ends tomorrow, based on a Bloomberg News survey of banks and securities companies. Thirty-year bonds were headed for the best start to the year since at least 1987. Demand at the Treasury’s sale of $15 billion of two-year floating-rate notes outstripped that at auctions of conventional fixed-coupon debt for the fourth straight time.

“You take the Fed at its word, but it’s always evolving,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “Their finger’s on the scale and depending on how they press it down or lift it up determines which direction the market’s going to go.”

Benchmark 10-year yields fell one basis point, or 0.01 percentage point, to 2.69 percent at 5:03 p.m. New York time, according to Bloomberg Bond Trader prices. The 2.75 percent note due in February 2024 rose 2/32 or 63 cents to 100 15/32. The yield climbed four basis points yesterday, the first increase since April 17.

Treasury Returns

Treasuries have gained 0.4 percent this month, the most since a 1.8 percent advance in January, and have added 2.1 percent this year through yesterday, according to Bloomberg U.S. Treasury Bond Index data. Thirty-year bonds have gained 10.4 percent this year, the most since records began in 1987, according to Bank of America Merrill Lynch index data.

The Bloomberg Global Developed Sovereign Bond Index has risen 0.8 percent in April. It is up 3.6 percent in 2014, exceeding the 1.6 percent gain from the MSCI All Country World Index of shares, including reinvested dividends.

Thirty-year bonds have rallied this month on the outlook for subdued inflation, while shorter-term notes lagged behind on speculation the Fed will raise interest rates at some point next year. The difference between two- and 30-year yields narrowed to 2.99 percentage points on April 25, the least since June. The spread was 3.05 percentage points today.

Apple Inc. is marketing $12 billion of bonds in the U.S. as the iPhone maker seeks a cheaper alternative to reward shareholders than overseas cash that’s subject to repatriation taxes. U.S. debt fell yesterday on speculation underwriters sold government debt to hedge interest-rate risk on the sale.

Fed Plans

Fed officials are winding down the most aggressive monetary stimulus in the central bank’s 100-year history, reducing asset purchases in March to a monthly pace of $55 billion from $85 billion in December and preparing to eventually raise the federal funds rate for the first time since 2006. The Fed’s reduction comes amid signs the U.S. economic recovery accelerated in the second quarter.

Policy makers will keep their target interest rate for overnight bank lending in a range of zero to 0.25 percent, a Bloomberg survey shows. Futures prices put the likelihood the Fed will start raising borrowing costs by its April 2015 at 36 percent, 48 percent by its June 2015 meeting and 70 percent by its July 2015 meeting, based on trading on the CME Group Inc.’s exchange.

“The tapering aspect is well built-in,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “The biggest wild card is any potential change in forward guidance.”

A gauge of consumer confidence was unchanged at 82.3 in April, The Conference Board’s index showed. The median forecast of 78 economists in a Bloomberg News survey had been 83.2.

Jobs Report

Employers added 215,000 workers in April, the most since November, based on a Bloomberg survey before the report May 2. The unemployment rate fell to 6.6 percent from 6.7 percent, according to the responses in a separate survey. The figure would match January’s as the lowest since October 2008.

“All the data we’ve seen this week is clearly important generally speaking, but not as much as these bigger-ticket items,” said Gabriel Mann, a U.S. government bond strategist at Royal Bank of Scotland Group Plc’s RBS Securities unit in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed. “The market already believes the Fed, and how dovish they’ve been.”

The floating-rate notes, which the Treasury introduced in January as the first added debt offering in 17 years, drew bids for 4.64 times the amount sold. That compared with a bid-to-cover ratio of 2.95 for the $701 billion in fixed-rate notes and bonds sold this year. The high-discount margin was 0.069 percent, matching that at the sale on March 26.

The Treasury is scheduled to announce tomorrow the amounts it will sell in three-, 10- and 30-year debt on consecutive days starting May 6.