BLBG: Treasuries Rise as Asian Stocks Decline Before U.S. Consumer Prices Report
Treasuries rose and were headed for a weekly gain before reports that are forecast to show a U.S. inflation gauge matched the lowest in four decades and consumer confidence deteriorated.
The 10-year note advanced for a third day and two-year yields were near a record low. Consumer prices likely dropped in June for a third straight month, showing inflation is contained as the recovery cools, economists said. Former Bank of England policy maker David Blanchflower said risks of a deflation “nightmare” mean officials including Federal Reserve Chairman Ben S. Bernanke should keep measures in place to spur growth.
“Low inflationary pressures may confirm some concerns of a double-dip in the U.S. economy, and that’s supportive for Treasuries,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate & Investment Bank in London. “Treasuries benefit in bouts of risk aversion as investors seek the safest assets.”
The benchmark 10-year yield dropped less than 1 basis point to 2.99 percent at 7:26 a.m. in New York, according to BGCantor Market Data. The 3.5 percent security due May 2020 rose 1/32, or $31 cents per $1,000 face amount, to 104 9/32. Yields declined six basis points this week.
The two-year note yield was at 0.60 percent, versus the record low of 0.5767 percent reached yesterday.
Consumer Prices
The U.S. consumer-price index fell 0.1 percent in June, a third monthly decline, according to the median forecast of 75 economists in a Bloomberg survey before the Labor Department report today. Excluding food and energy, prices increased 0.9 percent from a year earlier, matching the smallest annual gain since 1966, a separate survey showed.
A report from the University of Michigan will show its preliminary consumer sentiment index for July fell to 74 from 76 in June, according to the median forecast of 61 economists in a Bloomberg survey.
“There is very little inflation pressure at present against a backdrop of no more than a moderate economic recovery,” analysts at WestLB AG, including John Davies in London, wrote today. “There is likely to be a downturn in the University of Michigan index of consumer sentiment.”
International demand for long-term U.S. notes, bonds and stocks probably fell in May, according to the median forecast in a Bloomberg News survey of economists before the Treasury Department reports the figure today.
TIPS Spread
Net purchases declined to $40 billion from $83 billion in April, the survey shows.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.80 percentage points from this year’s high of 2.49 percentage points in January.
Deflation is “Bernanke’s and my nightmare,” Blanchflower said in an interview with Tom Keene on Bloomberg Radio. Most of the global economic recovery “is being driven by stimulus,” he said. “Caution to you if you start to take it off.”
Fed policy makers last month cut their outlook for inflation this year to a range of 1 percent to 1.1 percent, from 1.2 percent to 1.5 percent in April. A few policy makers expressed concern last month about some risk of deflation.
‘No Hurry’
“The perception is that there is an economic slowdown,” said Andy Richman, who oversees $10 billion as a strategist in Palm Beach, Florida for SunTrust Bank’s private wealth- management division. “The Fed is in no hurry to raise rates.”
The central bank has kept its target for overnight lending in a range of zero to 0.25 percent since December 2008. Futures on the CME Group Inc. exchange showed a 13 percent chance of the Fed raising its target lending rate for overnight bank loans by at least a quarter-percentage point by December, compared with a 27 percent likelihood a month ago.
The bulls are in a minority. A Bloomberg survey of banks and securities companies shows the 10-year yield will rise to 3.35 percent by year-end.
Recent economic reports showing an uneven recovery are consistent with “moderate” growth that may cause inflation to “drift upward,” Fed Bank of Richmond President Jeffrey Lacker said yesterday in Norfolk, Virginia.
Long-term Treasuries are getting too expensive, said Colin Embree, a trader in Singapore at Bank of Nova Scotia Asia Ltd., part of Canada’s third-largest lender.
Seeking Safety
Embree said he’s considering setting bets against the securities if yields fall another 15 basis points. Ten-year yields dropped to 2.88 percent on July 1, a level not seen since April 2009.
Investors are seeking safety in shorter maturities because of concern global growth is slowing, keeping the difference between two- and 10-year yields at a steep level, he said. The spread was 2.38 percentage points, more than double the average over the past 20 years.
“People are still piling into short-term Treasuries because of the global uncertainty,” Embree said. “This is probably not an area where you want to own long-term Treasuries.”
Thirty-year bonds, among the most sensitive to costs in the economy because of their long maturity, have outperformed shorter-term notes this year. Long bonds returned 14 percent, versus 6 percent for the broad market, according to Bank of America Merrill Lynch indexes.
30-Year Yields Attractive
Investors should buy 30-year bonds because their yields are attractive relative to 10-year notes, Barclays Capital analysts including Leef Dierks in Frankfurt wrote in a report today.
Thirty-year bonds yielded almost 1 percentage point more than 2020 notes, the most in 2010.
A $13 billion 30-year auction on July 14 drew a yield of 4.08 percent, less than the average forecast of 4.108 percent in a Bloomberg survey of eight of the Fed’s 18 primary dealers.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount offered, was 2.89, the most since March. Sales of three- and 10-year securities this week drew yields that were higher than forecast. The three auctions totaled $69 billion.
