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Treasuries Advance as Uneven Growth Complicates Fed Rates Path

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Treasuries rose for a second day after reports showed uneven economic growth, complicating the Federal Reserve’s intention to raise interest rates this year.

Thirty-year bonds led the gains as yields close to the highest levels since October reignited demand with the outlook for inflation subdued. Treasuries were supported as reports showed existing home sales were lower than forecast and Americans’ expectations for the economy slumped in May by the most since October 2013.

“We had poor data today -- that’s what’s driving this thing,” said Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “If 10 years get through that 2 percent level, we could see another leg lower.”

The 10-year yield dropped six basis points, or 0.06 percentage point, to 2.19 percent at 4:59 p.m. New York time, according to Bloomberg Bond Trader data. The price of the benchmark 2.125 percent note due in May 2025 rose 1/2, or $5 per $1,000 face value, to 99 13/32.

Thirty-year bond yields dropped six basis points to 2.99 percent after reaching 3.13 percent last week.

The Fed expects the economy to return to a “moderate pace” of growth after a first-quarter slowdown. Since the last meeting, payrolls figures have improved, while weaker-than-forecast data on manufacturing and retail sales prompted economists to mark down projections for second-quarter economic growth.

Economic Outlook

Contract closings for previously owned homes unexpectedly dropped 3.3 percent, figures from the National Association of Realtors showed. A measure tracking the economic outlook fell by 6 points to 44 this month, data from the Bloomberg Consumer Comfort Index showed.

As traders rule out the probability of a June rate hike, the odds of a Fed interest-rate increase in December were 56 percent, according to CME Group Inc. calculations of fed funds futures prices.

“I don’t expect a massive tightening,” said Brian Edmonds, the head of interest-rates trading in New York at Cantor Fitzgerald LP, one of 22 primary dealers that trade with the Fed. “They will be very cautious. It will probably happen later rather than sooner.”

Traders are skeptical the Fed will raise rates in June as inflation remains benign. Indirect bidders, a group of investors ranging from mutual funds to foreign central banks snapped up the majority of $13 billion in 10-year inflation indexed securities auctioned by the Treasury Thursday. The purchase, at 67.1 percent, was the second highest since 2003.

U.S. yields rose during the first two days this week by the most since February as a report Tuesday showed residential construction in the U.S. surged in April to the highest level in more than seven years.

Treasuries maturing in 10 years or longer bounced back Thursday after losing 4.99 percent this month, according to Bloomberg U.S. Treasury Bond Index data. The broader Treasury market has lost 1.23 percent during the period.

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