Treasury Bonds Rise for Second Week on Mixed Economic Signals

Treasury bonds rose for a second week, pushing the yield to the lowest level since June, as signs of uneven economic growth and escalating tension between Russia and Ukraine drove investors to the safety of U.S. debt.

Government securities gained as reports showed that the economy grew at the slowest pace in the first quarter since the last three months of 2012 and unemployment claims rose to a nine-week high last week even as the economy added the most jobs in April since January 2012. The Federal Reserve pressed ahead with reductions to its monthly bond-buying while holding its short-term interest-rate target at virtually zero. The Treasury will sell $69 billion of notes and bonds next week.

“The growth pattern is not that strong,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “That’s what helps the long end of the market. We’re not talking about a Fed that’s raising rates 400 basis points because the economy’s running way, we’re talking about a Fed that’s fine-tuning the rate-level structure, and the market’s adjusting to that.”

The 30-year Treasury bond yield declined eight basis points this week, or 0.08 percentage point, to 3.37 percent in New York, according to Bloomberg Bond Trader prices. The 3.625 percent securities maturing February 2044 rose 1 14/32 or $14.38 per $1,000 face amount, to 104 26/32. The yield touched 3.35 percent, the least since June 19.

Market Positions

Hedge-fund managers and other large speculators decreased their net-short position in 10-year note futures in the week ending April 29, according to U.S. Commodity Futures Trading Commission data. Speculative short positions, or bets prices will fall, outnumbered long positions by 114,425 contracts, down 22 percent from 145,865 the week before.

Traders added to bets on a gain in 30-year bonds to a net long position of 32,209, up from 16,385 the week before.

The bonds have gained 11.6 percent through May 1, their best start to a year since at least 1988, according to Bank of America Merrill Lynch index data. The securities will yield 4.10 percent by year-end, according to the median forecast of 50 economists in a Bloomberg News survey last month, down from a projection of 4.22 percent in a March survey.

The gap between yields of five- and 30-year debt, known as the yield curve, narrowed to 1.68 percentage points, the least since 2009 as traders moved forward bets on the date next year when the central bank may increase interest rates.

Fed Policy

“The Fed has been effective in talking down rates,” said Michael Materasso, senior portfolio manager and co-chairman of the fixed-income policy committee at Franklin Templeton Investments in New York, which oversees $347.5 billion of bonds. “They still have concerns as far as jobs and inflation being too low.”

Futures prices put the likelihood the Fed will start raising borrowing costs by its June 2015 at 50 percent yesterday, compared with 47 percent on May 1, based on trading on the CME Group Inc.’s exchange. The central bank has held its target for the federal funds rate at zero to 0.25 percent since December 2008.

The Fed said April 30 it will keep the benchmark interest rate close to zero for a “considerable time” after its bond-buying program ends. It reduced monthly debt purchases to $45 billion, its fourth straight $10 billion cut, and said further reductions in “measured steps” are likely.

At that pace, the stimulus program intended to push down borrowing costs for companies and consumers would end in December.

Market Dates

Treasuries will be closed May 5 in Japan and the U.K. for holidays. Trading will take place as usual in the U.S.

Demand at the Treasury’s sale of $15 billion of two-year floating-rate notes on April 29 outstripped that at auctions of conventional fixed-coupon debt for the fourth straight time as investors searched for better options to money-market securities. The high-discount margin was 0.069 percent, matching that at the sale on March 26.

The Treasury will sell $29 billion in three-year notes on May 6, $24 billion in 10-year notes on May 7 and $16 billion in 30-year bonds on May 8.

The 288,000 April jobs gain in employment followed a revised 203,000 increase the prior month that was stronger than initially estimated, Labor Department figures showed in Washington yesterday. The median forecast in a Bloomberg survey of economists called for a 218,000 advance. Unemployment dropped to 6.3 percent, the least since September 2008, from 6.7 percent as fewer people entered the labor force.

Jobs Reports

Labor force participation, measuring the share of the working-age population either employed or seeking a job, declined in April for the first time this year, helping drive the unemployment rate down. At 62.8 percent, the participation rate matches the lowest level since March 1978 and is down from 63.2 percent in the prior month.

Gains in Treasuries earlier this week came as the Labor Department reported May 1 that initial unemployment insurance claims increased 14,000 to 344,000 in the period ended April 26, the highest level since Feb. 22. The Commerce Department reported April 30 that gross domestic product growth slowed to a 0.1 percent annual rate in the first quarter from 2.6 percent the previous period.

Investors began closing out of bets that would benefit from a decline in Treasury prices yesterday amid a ratcheting up of tensions between Russia and Ukraine.

President Barack Obama and German Chancellor Angela Merkel set a May 25 trigger for possible economic sanctions against Russia. Obama and Merkel told a news conference at the White House yesterday that Russia must pull back support for the separatists so Ukraine’s May 25 presidential election can go ahead unimpeded.

“There’s concern that things are heating up there again,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “You saw the Ukrainian military go into the eastern cities and office buildings. Those sorts of things definitely boost the Treasury market.”

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