By Deborah Levine, MarketWatch
NEW YORK (MarketWatch) — Treasury prices rose slightly on Wednesday after a pair of U.S. economic reports signalled a slowdown in consumer spending and inflation, adding to the potential for Federal Reserve easing.
Coming up is the government’s sale of 10-year notes, which some say may be a key indicator of investor demand for Treasury debt as uncertainty out of Europe grows.
Yields on 10-year notes 10_YEAR -1.14% , which move inversely to prices, slipped 1 basis point to 1.66%, after being up slightly before the data. A basis point is one one-hundredth of a percentage point.
Yields on 30-year bonds 30_YEAR -0.40% erased a decline to trade at 2.77%.
Five-year note yields 5_YEAR -2.41% decreased 1 basis point to 0.74%.
Expectations are growing that “the Fed is considering stimulus measures,”
said David Darst, chief investment strategist of Morgan Stanley Smith Barney.
One report said U.S. wholesale prices fell 1% last month, more than some economists forecast and reducing inflation pressures. Read more on producer prices.
Separate data had retail sales slipping 0.2% in May — the second month in a row and the first time that’s happened in two years. See story on retail sales.
“The disappointing performance in consumer spending will certainly add to the case for more policy accommodation from the Fed, as it may be an indication of some persistence in the economic soft-patch that the recovery has become mired in,” said Millan Mulraine, senior U.S. strategist at TD Securities.
The Fed’s options
The Fed’s policy-setting Open Market Committee next meets on June 19-20. One option gaining traction among bond analysts would simply be extending its current program of buying longer-dated securities from the market and selling a roughly-equal amount of its short-term holdings. Doing so puts more funds into the financial system but doesn’t expand the Fed’s overall holdings.
“As the June 20 meeting quickly approaches and the situation in Europe has done little to reduce the need for more accommodation, we find ourselves increasingly cognizant of the rising risk that Operation Twist is extended another $200 billion and six months simply to avoiding crushing risk assets” by ending the program on schedule this month, said Ian Lyngen, senior government bond strategist at CRT Capital Group. That amount would roughly maintain the Fed’s current pace, he said.
“The notion of verbal intervention is attractive for the Fed as it does not expand the balance sheet and as has been repeatedly stressed by the Fed — there is currently a great deal of accommodation already in place,” Lyngen said.
