BLBG:Treasuries Advance On Bets Fed Will Act To Spur Economy
Treasuries rose, snapping a decline from yesterday, before U.S. data forecast to show production slowed and consumer confidence fell, adding to prospects that the Federal Reserve will take more steps to stimulate growth.
The policy-setting Federal Open Market Committee will meet June 19-20 as slowing employment growth in the U.S. and a deepening crisis in Europe weigh on the economic outlook. Demand for the relative safety of U.S. government debt was limited on speculation central banks will coordinate assistance if Greek elections on June 17 increase financial-market turmoil.
“The Fed is expected to do something to counter an economic slowdown,” said Hiromasa Nakamura, who helps oversee the equivalent of $41.9 billion as an investor at Mizuho Asset Management Co. in Tokyo. “That’s likely to keep yields under downward pressure.”
The 10-year yield fell two basis points, or 0.02 percentage point, to 1.62 percent as of 7:05 a.m. in London, after rising five basis points to 1.64 percent yesterday, according to Bloomberg Bond Trader data. The 1.75 percent note due in May 2022 gained 7/32, or $2.19 per $1,000 face amount to 101 6/32. The 10-year rate, which touched a record low of 1.44 percent on June 1, ended last week at 1.64 percent.
Japan’s benchmark 10-year yield slid one basis point to 0.85 percent. The rate touched 0.79 percent on June 4, the least since 2003.
U.S. Economy
U.S. data due today are projected to show the recovery in the world’s largest economy is losing momentum. Growth in industrial production probably slowed to 0.1 percent last month from 1.1 percent in April, according to the median estimate of economists surveyed by Bloomberg News.
A gauge of manufacturing in the New York region is estimated to have fallen to 13 in June from 17.09 in May, a separate survey showed. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment probably declined to 77.5 this month from 79.3 in May, the highest since October 2007, economists forecast.
“The situation in Europe poses significant risks to the U.S. financial system and economy and must be monitored closely,” Fed Chairman Ben S. Bernanke told lawmakers on June 7. “As always, the Federal Reserve remains prepared to take action as needed to protect the U.S. financial system and economy in the event that financial stresses escalate.”
Fed Bank of Chicago President Charles Evans said he would support a variety of measures to generate faster job growth. He spoke in an interview on Bloomberg Television’s “In the Loop” with Betty Liu that was aired June 12.
Quantitative Easing
The Fed bought $2.3 trillion of bonds in two rounds of so- called quantitative easing, or QE, from December 2008 to June 2011, seeking to cap borrowing costs and stimulate the economy. The central bank plans to buy as much as $1.5 billion of Treasury Inflation Protected Securities due from July 2018 to February 2042 today under its program known as Operation Twist, which aims to replace holdings of shorter-term securities with longer-term bonds, according to the Fed Bank of New York’s website.
Greece’s June 17 vote will turn on whether the nation accepts open-ended austerity to stay in the euro or rejects the conditions of a bailout and risks the turmoil of becoming the first to exit the 17-member currency.
Central banks of major economies are preparing for coordinated action to provide liquidity if needed after Greek elections, Reuters reported, citing officials linked to Group of 20 nations. G-20 policy makers are due to meet June 18-19.
U.S. government securities declined yesterday as the nation sold $13 billion of 30-year bonds at a record-low yield.
Treasury Sales
The long bonds sold yesterday yielded 2.720 percent, versus a forecast of 2.725 percent in a Bloomberg survey of eight of the Fed’s 21 primary dealers. The auction’s bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.40, the lowest since November, versus an average of 2.66 at the past 10 sales.
The government sold $32 billion in three-year securities on June 12, and $21 billion of 10-year notes on June 13 at a record-low yield of 1.622 percent.
“We are in a low interest-rate environment for a longer period of time, and investors are now understanding that,” Wilmer Stith, a portfolio manager in a group that oversees $14 billion at Wilmington Trust Investment Managers in Baltimore, said in a telephone interview.
Slowing inflation and economic indicators that suggest a recovery in the world’s largest economy is losing momentum may encourage the Fed to ease monetary policy, Mizuho’s Nakamura said.
Consumer Prices
The consumer-price index declined 0.3 percent in May, the biggest drop since December 2008, after no change the prior month, the Labor Department reported yesterday.
The gap in yields between 10-year notes and Treasury Inflation Protected Securities, which represents traders’ expectations for inflation over the life of the debt, was 2.1 percentage points, down from a 2012 high of 2.45 percentage points in March.
A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.57 percent on June 12, down from a 2012 high of 2.78 percent on March 19 and a five-year average of 2.8 percent.
“Deflation is likely to become a worry for the Fed,” Nakamura said. “The Treasury 10-year yield will be falling down the road to 1 percent, converging with Japan’s.”
To contact the reporter on this story: Monami Yui in Tokyo at myui1@bloomberg.net
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
