Treasury Bulls Regain Control as Economic Signs May Delay Fed

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September is quickly turning into December in the bond market.

Treasury rallied for a second day and erased the losses recorded during this week’s market rout after reports showed the U.S. economy is losing momentum. Traders are viewing softer-than-projected economic data as a challenge to any Federal Reserve interest-rate increase this year.

“It puts people’s forecast for the first rate hike definitely away from June,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “September is a strong possibility, but September could easily be December.”

Ten-year note yields declined nine basis points, or 0.09 percentage point, to 2.14 percent as of 5 p.m. New York time. The benchmark 2.125 percent security due in May 2025 gained 25/32, or $7.81 per $1,000 face amount, to 99 27/32. The yield fell Friday by the most on a closing basis since May 1 and declined one basis point this week.

“We’ve gone through technical levels,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. We had “an unwind of the overbought condition in global markets. As that’s turned, we’ve had weak economic data.”

Relative Value

The odds of a Fed interest-rate increase in September were to 18 percent, according to CME Group Inc. calculations of fed funds futures prices. The odds for December are 51 percent.

The Fed has kept its benchmark, the target for overnight loans between banks, in a range of zero to 0.25 percent since December 2008 to support the economy. It last raised the rate in 2006.

A report showed industrial production unexpectedly declined in April, while consumer confidence fell this month by the most in more than two years.

“Besides the employment data, everything else is coming out on the weak side,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “It’s a reversal of what we’ve seen over the last couple of weeks.”

Bonds were also supported at auctions this week as investors were lured by some of the highest yields this year.

Auction Demand

Bidding from so-called indirect bidders, ranging from mutual funds to foreign buyers at Thursday’s $16 billion 30-year bond sale was 50.8 percent, compared with an average of 48.6 at the past 10 auctions. Indirects surged at Wednesday’s $24 billion 10-year note sale to the highest level since December 2011, while demand at Tuesday’s $24 billion three-year note sale was the highest since December 2009.

Euro-area government bonds from Italy to Spain also advanced for a second day as some of the region’s biggest banks said a global selloff in fixed-income markets may be waning.

German 10-year bunds pared a fourth weekly drop, which would be the longest run since June 2012. BNP Paribas SA said the slump is nearing its end.

Treasuries are attractive versus major peers on a relative-value basis. The 10-year yield is almost one percentage point higher than the average of the Group of Seven nations, according to data compiled by Bloomberg.