BLBG: Treasuries Gain on Outlook for Low Inflation, Employment, Rates
By Susanne Walker
June 19 (Bloomberg) -- Treasuries rose, pushing 10-year yields near the lowest since the week ended May 15, 2009, on speculation weak employment and subdued inflation will persuade the Federal Reserve to keep interest rates at a record low.
Ten-year notes pared their five-day gain yesterday as concern eased that Europe’s debt crisis would worsen. U.S. data earlier showed consumer prices declined, housing starts dropped and unemployment claims rose, fueling demand for the safety of government bonds. The Treasury will sell $108 billion in shorter-term notes next week, $5 billion less than last month.
“You’ve got weaker data, and people are starting to question where the economy is right now,” said Richard Volpe, co-head of interest rates in Stamford, Connecticut, at Royal Bank of Scotland Group Plc, one of 18 primary dealers that trade with the U.S. central bank. “In this environment, we don’t expect to hear anything out of the Fed.”
The 10-year note yield fell 2 basis points, or 0.02 percentage point, to 3.22 percent, according to BGCantor Market Data. It was 3.20 percent on June 4, the lowest weekly close in almost 13 months. The 3.5 percent security due May 2020 rose 3/32, or 94 cents per $1,000 face amount, to 102 11/32. The two- year note yield fell 2 basis points to 0.71 percent.
Treasuries gained even as stocks rose for the week on prospects for greater stability in Europe, with the Standard & Poor’s 500 Index advancing 2.4 percent and the MSCI World Index climbing 3.2 percent.
Prices, Jobs
The consumer price index declined 0.2 percent in May, the biggest drop since December 2008, data from the Labor Department showed on June 17. Initial claims for jobless benefits unexpectedly rose to 472,000 for the week ended June 12, the department said. Economists in a Bloomberg survey forecast a slide to 450,000. Housing starts fell 10 percent in May, the biggest tumble since March 2009, Fed data showed on June 16.
The difference in yields between 10-year Treasury Inflation-Protected Securities, or TIPS, and comparable conventional notes showed money managers expect the consumer price index to increase an average 2.02 percent a year in the next decade, down from 2.41 percent at the end of 2009. The gap touched 1.83 percent on May 21, the narrowest since Oct. 9.
All 90 economists in a Bloomberg News survey forecast that U.S. policy makers will hold the benchmark interest rate at a record low range of zero to 0.25 percent, where it has been since December 2008, at the end of a two-day meeting on June 23.
‘Fed on Hold’
“The drumbeat of the Fed on hold deep into 2011 is attracting more votes among investors,” Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee, wrote in a note to clients. “More capitulated on the combination low-inflation, slow-employment grind signals.”
Futures on the CME Group Inc. exchange yesterday showed a 77 percent chance the Fed will maintain or cut interest rates by its December meeting, up from 62 percent a month earlier.
The central bank reiterated on April 28 at the end of its last policy meeting that it intended to keep the rate near zero for an “extended period” to help spur economic recovery.
“There’s no risk in any language change at this particular meeting, coming on the heels” of the debt crisis in the European Union, said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC.
The Treasury will auction $40 billion in 2-year notes, $38 billion in 5-year securities and $30 billion in 7-year debt in successive daily sales that begin on June 22, the department said on June 17. That compares with offerings of $42 billion, $40 billion and $31 billion of the notes last month. Next week’s total is the lowest for sales of the notes since June 2009.
‘Heavy Lifting’ Done
Matthew Rutherford, the Treasury’s deputy assistant secretary for federal finance, said earlier this year the department was confident the “deficit situation” would improve and that auction sizes had reached their peak. “The heavy lifting is done,” he said at a Feb. 3 press conference.
U.S. securities are set for their best first half in a decade. Treasuries have returned 4.5 percent since Dec. 31, heading for the largest gain in the first six months of a year since 2000, Bank of America Merrill Lynch indexes show.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., boosted holdings of U.S. government-related debt to the highest level in six months.
The $227.9 billion Total Return Fund’s investment in the debt was increased to 51 percent of assets in May, from 36 percent the previous month, according to the website of Newport Beach, California-based Pimco.
Treasuries, part of the government-related category, are the premier holdings for fixed-income investors with the U.S. economy failing to produce private-sector jobs and Europe’s sovereign-debt crisis threatening the region’s banking sector, Gross, 66, said this month.
European policy makers, striving to keep the region’s sovereign debt crisis from accelerating, last month unveiled a rescue package worth almost $1 trillion. Investors speculated this week that stress tests the EU said it will publish will show that Europe’s banks are robust.
To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net
