BLBG: Treasury Two-Year Yield Near Record Low as Industrial Output Probably Fell
Treasury two-year yields were within three basis points of a record low before reports today that economists said will show industrial production and producer prices fell last month.
Treasury Inflation Protected Notes showed investors lowered their expectations of future consumer price gains for a second day, after policy makers trimmed economic-growth forecasts in minutes of the Federal Reserve’s June meeting. Futures contracts show traders cut bets the Fed will raise its benchmark interest rate by April to 46 percent from 52 percent a week ago, based on trades on the CME Group Inc. exchange in Chicago.
“The U.S. cannot raise interest rates for the foreseeable future,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $65 billion in assets. “That will provide a good anchor for yields.”
The two-year note yielded 0.61 percent as of 7:13 a.m. in London, according to BGCantor Market Data. The 0.625 percent security due in June 2012 traded at a price of 100 1/32. Yields fell to the record low of 0.5856 percent on June 30. Ten-year rates were little changed at 3.03 percent.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.84 percentage points from this year’s high of 2.49 percentage points in January.
Fukoku shifted funds to Treasuries, German bonds and French securities this month, seeking higher yields after rates in Japan tumbled, Okumoto said. Japan’s 10-year rate fell to 1.055 percent on July 1, a level not seen since 2003.
Industrial Production
Ten-year Treasuries offer 1.90 percentage points of extra yield over same-maturity notes in Japan, with the gap narrowing from this year’s high of 2.61 percentage points in April.
U.S. industrial production fell 0.1 percent in June from May, the first decline in a year, based on the median forecast in a Bloomberg News survey of 76 economists before the Fed report. The Labor Department will say prices paid to producers slid for a third month, a separate survey showed.
Ten-year yields may decline to 2.75 percent by year-end, said Mitsuo Masuda, manager of fixed-income investment in Tokyo at Japan’s third-largest life insurer by policy holders.
“Concerns about slowing growth will cap any spikes in bond yields and create the basis for declines in yields toward the end of this year,” he said in an interview.
Treasuries gained yesterday after minutes of the Fed’s June meeting showed policy makers noted that risks to the recovery increased. U.S. central bankers lowered their forecast for growth this year to a range of between 3 percent and 3.5 percent, from 3.2 percent to 3.7 percent in April.
Deflation Concerns
“The economic outlook had softened somewhat and a number of members saw the risks to the outlook as having shifted to the downside,” according to the Fed’s minutes. “A few participants cited some risk of deflation” at the meeting.
The risk of prices falling in the U.S. is “overrated,” Deutsche Bank AG, one of the 18 primary dealers that trade directly with the Fed, said in a report yesterday.
“So long as the economy continues to recover, even at a sluggish pace, inflation could soon bottom and begin moving higher,” according to the report by analysts including Peter Hooper, Deutsche Bank’s chief economist. “This means the Fed’s ‘low for long’ policy could well be abbreviated.”
Bank of America Merrill Lynch, another primary dealer, said investors should be “overweight” stocks and “underweight” bonds.
“We recommend selectively adding to risk,” strategists Michael Hartnett and Joseph Zidle wrote in a report July 13. There’s “no apocalypse” in the economy, the report said.
30-Year Sale
Government securities also rose yesterday after the U.S. sold $13 billion of 30-year bonds at a lower-than-forecast yield and data showed retail sales dropped in June by more than economists expected.
The auction drew a yield of 4.08 percent, the lowest since October, compared with an average forecast of 4.108 percent in a Bloomberg News survey of eight primary dealers. Thirty-year bonds benefit most from slowing inflation because of their long maturity.
“The Fed is on record talking about deflation, which they haven’t in some time,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada, one of the 18 primary dealers required to bid in U.S. debt auctions. “When the Fed starts to identify things by name, that means it is seriously on their minds -- and this is helping the market.”
The U.S. consumer-price index fell 0.1 percent in June, a third monthly decline, according to a Bloomberg survey before the Labor Department reports the figure on July 16. Excluding food and energy, prices increased 0.9 percent from a year earlier, matching the smallest annual gain since 1966, a separate Bloomberg survey showed.
To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
