U.S. 10-Year Yields at 6-Week Low as Yellen Sees Stimulus Need

Treasury 10-year note yields traded at almost the lowest level in six weeks after Federal Reserve Chair Janet Yellen said monetary stimulus is still required with “significant slack” in labor markets.

U.S. debt fell earlier after a report showed retail sales may contribute to a second-quarter economic revival. The benchmark notes gained as Yellen told a congressional committee interest rates are likely to stay low for a “considerable period” after bond purchases end, which she said may happen following the Fed’s October meeting. Shorter-term notes declined as futures prices show a 75 percent chance the central bank will raise its key rate by September 2015.

Yellen “stayed with the current stance,” said Thomas Tucci, managing director and head of Treasury trading in New York at CIBC World Markets Corp. “If the economy weakens, they will stay accommodative. If it firms, they will remove accommodation. It’s the same story.”

The 10-year note yield was unchanged at 2.55 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader prices. The price of the 2.5 percent note due in May 2024 closed at 99 19/32. The benchmark note yield reached 2.49 percent on July 10, the least since June 2.

Three-year note yields rose two basis points, or 0.02 percentage point, to 0.97 percent.

Market Positions

The amount of Treasuries traded through Icap Plc, the largest inter-dealer broker of U.S. government debt, rose to $342 billion, from $159 billion yesterday. The daily average volume this year is $331 billion.

Investors in Treasuries increased bets the prices of securities would drop in value, in the week ending yesterday, according to a survey by JPMorgan Chase & Co.

The proportion of net shorts, or bets the price of the securities will decrease, rose to 29 percentage points, from 25 percentage points the previous week, according to JPMorgan. The percent of outright shorts, or bets the securities will drop in value, rose to 40 percent, from 38 percent. The percent of outright longs dropped to 11 percent, from 13 percent.

Investors held neutral bets at 49 percent, the survey found.

“A high degree of monetary policy accommodation remains appropriate,” Yellen said today in semi-annual testimony prepared for delivery to the Senate Banking Committee. “Although the economy continues to improve, the recovery is not yet complete.”

Fed View

While the economy appears likely to rebound from a first-quarter contraction, Yellen said the progress “bears close watching.” Signs of labor-market slack include slow wage growth and low labor-force participation, Yellen said.

“It’s reassuring to the financial markets that the Fed will not be doing anything too quickly to disrupt the economy,” said Gary Pollack, who manages $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York.

The Bloomberg Global Developed Sovereign Bond Index has returned 4.9 percent this year, erasing a loss from 2013. Treasuries have gained 3.2 percent this year, the Bloomberg World Bond Indexes show.

Treasuries yield 70 basis points more than their Group-of-Seven peers on average, according to data compiled by Bloomberg. The spread was as much as 73 basis points earlier in July, the most in more than four years, according to closing-price data.

Inflation Measure

The five-year, five-year forward break-even rate climbed to 2.51 percentage points in the most recent reading, from July 10, the highest level since Feb. 12. The index, which measures inflation expectations for the five years starting in 2019, has climbed from this year’s low of 2.38 percentage points set on March 21.

It compares with a five-year average of 2.73 percentage points. In 2013, the measure ranged between 2.33 percentage points and 2.89 percentage points.

Recent inflation data, while “noisy,” suggest that consumer prices “are moving back gradually over time toward our 2 percent objective,” Yellen said in June.

The U.S. debt held by the public is expected to rise to 106 percent of the economy in 2039 from 74 percent this year, largely driven by increases in the cost of health benefits, the Congressional Budget Office said. To put federal finances on a sustainable path, Congress must boost revenue, cut spending on benefit programs or combine the approaches, the nonpartisan CBO said in its long-term budget outlook.

Economic Reading

Retail sales increased 0.2 percent in June after a 0.5 percent advance in May that was larger than previously reported, Commerce Department figures showed. The reading fell short of the 0.6 percent increase projected by the median estimate of 83 economists surveyed by Bloomberg, restrained by a drop among auto dealers.

Gross domestic product expanded 3.3 percent at an annual rate in the second quarter, according to the median forecast in a Bloomberg News survey of economists. GDP contracted at a 2.9 percent rate in the first quarter, the worst performance since 2009.

“The June numbers were a small miss, but there were actually pretty healthy upward revisions to the previous data,” said John Briggs, a U.S. government-bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 22 primary dealers that trade with the Fed.

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