Treasuries advanced for a second day and European government bonds surged after data from China and the euro area added to evidence that global growth is faltering and spurred demand for the safest assets.
Benchmark 10-year yields dropped to the lowest level in more than four months after New York Federal Reserve Bank President William C. Dudley said yesterday “more needs to be done” to shore up world growth. China’s manufacturing is expanding at a slower pace and euro-area output contracted for a 15th consecutive month in April, data showed today. The U.S. is scheduled to sell $35 billion of two-year debt, in the first of three note auctions this week totaling $99 billion.
“The China data was weaker than expected and that is creating some risk-off in the market and supporting core bonds, including Treasuries,” said Piet Lammens, head of research at KBC Bank NV in Brussels. “While we don’t see a reason for an immediate turnaround in Treasuries and a selloff, we don’t take long positions in them because they are expensive.”
A long position is a bet that an asset’s price will climb.
Benchmark 10-year yields fell three basis points, or 0.03 percentage point, to 1.66 percent as of 6:46 a.m. in New York, according to Bloomberg Bond Trader data, after reaching 1.64 percent, the lowest level since Dec. 12. The price of the 2 percent note due February 2023 increased 10/32, or $3.13 per $1,000 face amount, to 103 2/32. The 30-year bond yield dropped four basis points to 2.84 percent.
Germany’s 10-year yields fell two basis points to 1.21 percent after touching 1.19 percent, the lowest since July 24. The rate on similar-maturity Italian securities decreased as much as eight basis points to 3.975 percent, dropping below 4 percent for the first time since November 2010.
Output Data
The preliminary reading of 50.5 for China’s Purchasing Managers’ Index released by HSBC Holdings Plc and Markit Economics compared with a final 51.6 for March. The figure was also below the median 51.5 estimate in a Bloomberg News survey of 11 analysts. A reading above 50 indicates expansion.
A composite index of activity in the service and manufacturing industries in the 17-nation euro bloc was 46.5 this month, a separate report showed.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, was negative 0.82 percent yesterday in the U.S. It was minus 0.83 percent last week, which was the lowest level since December. Negative readings indicate investors are willing to accept yields below what’s considered fair value.
Fed Buying
The Fed’s policy of buying bonds to support growth, known as quantitative easing, has helped to compress yields even as the U.S. economy shows signs of recovery.
“Quantitative easing has led to a bubble in bonds,” said Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $50.1 billion. “At some point, they will have to end the policy. It could be very risky for the market.”
The Fed is buying $85 billion of Treasury and mortgage bonds a month to boost the economy by putting downward pressure on borrowing costs.
The central bank plans to purchase as much as $1 billion of securities maturing between August 2023 and February 2031 today, according to the New York Fed’s website.
“Monetary policy has been effective at fostering easier financial market conditions,” Dudley said yesterday at the Transatlantic Economic Interdependence and Policy Challenges conference, cosponsored by the New York Fed and the European Commission. “Nevertheless, the United States could be doing better,” he said.
Bond Returns
Treasuries have returned 0.7 percent this year, according to Bank of America Merrill Lynch indexes. German government bonds have also earned 0.7 percent, the indexes show.
Bidding has slowed at Treasury auctions this year, with the $632 billion in debt sales attracting an average of $2.95 in orders to buy per dollar of debt sold, compared with a record $3.15 in 2012, data released by the Treasury and compiled by Bloomberg show.
The two-year notes scheduled for sale today yielded 0.23 percent in pre-auction trading. The previous two-year auction on March 26 drew bids for 3.27 times the amount of securities available, the lowest level since July 2011.
Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index fell to a record 50.58 basis points yesterday, below the previous low of 51 basis points reached in December. The data stretches back to 1988.
U.S. Growth
U.S. gross domestic product expanded at a 3 percent annual rate in the first quarter after growing 0.4 percent in the final three months of 2012, according to the median forecast of economists surveyed by Bloomberg News before a Commerce Department report on April 26.
Separate data today will show sales of new houses climbed, based on responses from economists.
Allen Lei, a Taipei-based Treasuries trader at Hontai Life Insurance Co., said he bought earlier today. The 10-year yield’s inability to rise through its 200-day moving average during the past week helped him decide to make the purchase, he said.
Ten-year yields were as high as 1.73 percent yesterday, versus the 200-day rate of 1.75 percent. The average is an indicator of momentum.
“It’s hard to move up above that level,” said Lei, who helps manage the equivalent of about $6.1 billion in assets.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
