Treasuries Gain Most in 3 Weeks on Latest Evidence of Slowdown

If investors needed more evidence that economic growth stalled in the first quarter, a drop in capital-goods orders provided it.

Treasuries rose the most in three weeks after orders for business equipment unexpectedly fell in March for a seventh month. That followed below-forecast results for payrolls, retail sales and housing starts last month, and comes before a gross-domestic-product report next week projected to verify the slowdown. It all comes as the Federal Reserve weighs whether the economy can withstand the first interest-rate increase since 2006.

The capital-goods miss is “obviously what’s driving the run-up,” David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “It’s confirming what many of us have suspected, that the first quarter is going to be weak.”

The U.S. 10-year yield dropped five basis points, or 0.05 percentage point, the most since April 3, to 1.91 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. The price of the benchmark 2 percent note due in February 2025 rose 14/32, or $4.38 per $1,000 face value, to 100 26/32.

Yields have traded in a range of 1.80 percent to 2.01 percent in the past month, and are down from 2.17 percent at the end of 2014.

Fed Watching

Bookings for non-military capital goods excluding aircraft, a proxy for future corporate spending on new equipment, dropped 0.5 percent, data from the Commerce Department showed Friday in Washington. Demand for all durable goods -- items meant to last at least three years -- rose 4 percent on aircraft and autos.

The Federal Open Market Committee, which meets next week in Washington, was split at its meeting last month on when to begin raising rates that have been held in a range of zero to 0.25 percent since 2008 to support the economy.

Several participants wanted to start raising rates in June, while others favored later in the year or even 2016, according to minutes of the March 17-18 meeting. Policy makers also dropped a pledge to be “patient” as they reduced forecasts for the path of increases.

Most economists expect the central bank to raise rates in September, according to the latest Bloomberg survey, versus a June liftoff predicted last month.

September Leeway

“This certainly gives the Fed leeway to wait until September,” said Coard of Williams Capital.

As investors have pushed back their forecasts for the Fed’s first rate increase, trading has become more focused on the economy’s long-term growth potential “than the timing of the Fed’s first hike,” said Thomas Graff, who manages $3.6 billion of fixed-income assets at Brown Advisory Inc. in Baltimore.

The next key data point will be first-quarter gross domestic product, released on April 29, which is forecast to add more evidence that growth was slowed by the brutal winter that buried much of the U.S. The economy grew at an annualized pace of 1 percent in the quarter, down from 2.2 percent for the fourth quarter of 2014, according to the median forecast in a Bloomberg survey.

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