Treasuries Gain as Lack of Sales Growth Fuels Concern on Economy

Treasuries rose, pushing 10-year yields toward a one-year low, as a report showing U.S. retail sales were little changed in July amid tepid wage growth added to signs the economy will struggle to gain momentum.

The government auctioned $24 billion of 10-year notes at the lowest yield in more than a year. Thirty-year bonds gained for the first time in four days before the U.S. sells $16 billion of the securities tomorrow. Bets on a U.S. interest-rate increase by June declined, while sovereign bonds in Germany and Japan advanced amid disappointing data there.

“The retail sales report was weak,” said Sean Murphy, a trader in New York at Societe Generale SA, one of 22 primary dealers that trade with the Federal Reserve. “Central banks will err on the side of lower for longer. They are worrying about the slack.”

The U.S. 10-year yield fell three basis points, or 0.03 percentage point, to 2.42 percent at 5 p.m. New York time, according to Bloomberg Bond Trader data, after rising earlier to 2.47 percent. The yield slid on Aug. 8 to 2.35 percent, the least since June 20, 2013. The price of the 2.5 percent securities due in May 2024 increased 9/32, or $2.81 per $1,000 face amount, to 100 23/32.

Five-year note yields dropped four basis points to 1.58 percent, and 30-year bond yields decreased three basis points to 3.24 percent.

Benchmark 10-year notes were at almost the cheapest level in a week versus Group of Seven peers. The extra yield U.S. 10-year notes offer was 71 basis points, after touching 72 basis points yesterday, the highest since Aug. 4. That compared with as little as 37 basis points in February.

Volume Rises

The amount of Treasuries traded through ICAP Plc, the largest inter-dealer broker of U.S. government debt, increased to $340 billion, from $265 billion yesterday. The average daily volume this year is $326 billion. It reached $504 billion on Aug. 1, the highest level in three months, and fell on Aug. 4 to $197 billion.

A gauge of Treasury-market volatility declined for a third day. Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, was 58.8 basis points after climbing on Aug. 8 to 62.5, the highest since June 5. The 2014 average is 59 basis points.

Auction Yield

The notes sold today yielded 2.439 percent, the least since June 2013, compared with a forecast of 2.435 percent in a Bloomberg News survey of six primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.83, the highest since June. The average ratio at the past 10 sales was 2.69.

Indirect bidders, an investor class that includes foreign central banks, bought 47 percent of the notes, compared with an average of 44.5 percent for the past 10 sales. Direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, purchased 15.1 percent, versus an average of 17.8 percent at the past 10 auctions.

“There is definitely underlying demand,” said Stanley Sun, a New York-based strategist at Nomura Holdings Inc., which as a primary dealer is obligated to bid in U.S. debt sales. “Overall, it was a pretty strong performance.”

Yesterday’s auction of $27 billion of three-year notes drew the lowest yield since April as speculation turmoil in Ukraine and Iraq will worsen fueled investor demand for safety. The sale drew bids for 3.03 times the amount offered, versus an average of 3.35 at the past 10 sales.

‘Red Flag’

U.S. retail sales had the worst performance in six months, Commerce Department data showed today in Washington. The median forecast of 82 economists surveyed by Bloomberg had called for a 0.2 percent gain matching the advance in June. Excluding cars, sales last month rose 0.1 percent, versus a projection for a 0.4 percent increase.

“It raises a red flag,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “I don’t think it necessarily changes the Fed’s timing, but it does raise a little bit of a concern in terms of, is this trend going to continue?”

Traders saw a 36 percent chance the central bank will increase its benchmark interest-rate to at least 0.5 percent by June, futures trading showed. That compared with a 51 percent likelihood seen at the end of last month. The target has been kept in a range of zero to 0.25 percent since 2008.

Job growth has yet to stoke the type of wage gains needed to boost household purchases, a sign the economic expansion will probably not sustain the pickup in the second-quarter, when U.S. gross domestic product rose an annualized 4 percent.

Hourly Earnings

While U.S. employers added more than 200,000 jobs for a sixth straight month in July, average hourly earnings were little changed, Labor Department data showed on Aug. 1.

German 10-year bund yields approached a record low, falling three basis points to 1.03 percent, as data confirmed the nation’s consumer-price growth slowed last month. Germany’s economy shrank 0.1 percent in the second quarter, economists surveyed by Bloomberg forecast before data due tomorrow.

Japan’s Cabinet Office said gross domestic product fell an annualized 6.8 percent in the three months through June. Japanese government 10-year bond yields touched 0.51 percent, the lowest this week.

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