Treasuries Post Biggest Gains Since May Amid Uneven Expansion

Treasuries delivered the biggest weekly gains in more than a month amid an uneven U.S. economic expansion, suggesting the Federal Reserve won’t accelerate the pace of projected interest-rate increases.

Ten-year notes headed for a second quarterly gain after the Fed cut its long-term forecasts for economic growth and its target interest rate earlier this month. Citigroup Inc., one of the 22 primary dealers that trade with the central bank, cut its year-end forecast for the 10-year note yield by 40 basis points after data this week showed gross domestic product shrank more than analysts predicted.

“It’s the weak data,” said Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, a primary dealer. “We’re now looking at full year growth of less than 2 percent.” The firm expects second-quarter growth of 3.2 percent, down from 4 percent, he said.

The 10-year note yield fell seven basis points, or 0.07 percentage point, to 2.53 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data, down from 2.72 percent on March 31. The 2.5 percent note due May 2024 rose 20/32, or $6.25 per $1,000 face amount, to 99 22/32 this week. The yield was little changed today.

The Citigroup Economic Surprise Index, which measures whether U.S. data are above or below market expectations, slid to minus 23.1 yesterday, the least since May 1, boosting demand for bonds.

Bond Returns

Treasuries returned 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities gained 4.8 percent, while Japan’s earned 1.5 percent.

Citigroup reduced its year-end forecast for the 10-year note yield to 2.95 percent, from 3.35 percent.

“The data have been very disappointing -- 2014 should have been a breakout year for growth with consensus estimates close to 3 percent for the year,” strategists Amitabh Arora and Kevin Shapiro wrote in a report today.

The firm also cut year-end estimates for the 30-year bond yield to 3.45 percent, from 3.85 percent, and the yield on the five year note to 2.25 percent from 2.45 percent.

Fed officials at a June 17-18 meeting cut their long-run estimate for the target interest rate to 3.75 percent from 4 percent and lowered their prediction for long-term economic growth to a range of 2.1 percent to 2.3 percent, versus 2.2 percent to 2.3 percent forecast in March.

Fed Chair Janet Yellen last week affirmed policy makers’ plan to hold the benchmark rate near zero for a “considerable time.”

Volatility Declines

The central bank left its target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, declined one basis point to 53.25 basis points yesterday, the lowest since May 2013. The gauge has dropped from last year’s high of 117.89 basis points set in July.

Companies in the U.S. added 205,000 workers in June after hiring 179,000 the previous month, economists forecast before a July 2 report from ADP Research Institute. Labor Department data the following day will show payrolls increased by 215,000 in June, down from 217,000 last month.

Fed Outlook

U.S. GDP shrank at a 2.9 percent annualized rate in the first quarter, the worst reading since the same three months in 2009, the Commerce Department said June 25. Reports yesterday showed consumer spending rose less in May than economists predicted, and initial claims for jobless benefits were higher last week than analysts forecast.

“Yellen is dovish and first-quarter GDP data gives her a reason to continue to be dovish,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “It costs money to be short Treasuries. I think the market will struggle to sell off over the next few months.” A short position is a bet that asset prices will fall.

Traders have cut to 54 percent the chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, down from 66 percent odds at the end of March, fed funds futures showed.

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