BLBG: Treasury Gain Pushes Yield to 3-Week Low as Aussie Bonds Rally
Treasuries rose, sending benchmark 10-year yields to the lowest level in three weeks, as a gauge showed U.S. economic data is failing to beat estimates before job data next week.
The Citigroup Economic Surprise Index, which measure whether U.S. reports are above or below market expectations, slid to minus 23.1 yesterday, the least since May 1. The Federal Reserve cut its long-term forecasts for economic growth and its target interest rate this month, and data this week showed gross domestic product shrank more than analysts predicted. Australian and Japanese bonds also rallied. A gauge of volatility in the Treasury market fell to the lowest since May 2013.
“We have been consistently positive about the outlook for U.S. Treasuries,” said Yusuke Ito, a bond manager at Mizuho Asset Management Co. in Tokyo. A lower forecast for the Fed’s long-term target rate “is a strong message that growth for the U.S. economy going forward is not going to be as strong as they expected,” he said.
The U.S. 10-year yield fell one basis point, or 0.01 percentage point, to 2.52 percent at 7:13 a.m. in London, according to Bloomberg Bond Trader prices. The 2.5 percent note due May 2024 gained 2/32, or 63 cents per $1,000 face amount, to 99 26/32. The yield earlier dropped to 2.51 percent, the lowest level since June 2.
The benchmark yield will decline to 2.20 percent in the next three months, Mizuho’s Ito said.
Australia, Japan
Australia’s 10-year yield fell as much as seven basis points to 3.52 percent, the lowest since June 2013. The yield has dropped 11 basis points in June, set for the first three-month decline since the period ended September 2011.
Japanese 10-year yields dropped as much as one basis point to 0.555 percent, the lowest level since May 2013.
Fed officials at a June 17-18 meeting cut their long-run estimate for the target interest rate to 3.75 percent from 4 percent and lowered their prediction for long-term economic growth to a range of 2.1 percent to 2.3 percent, versus 2.2 percent to 2.3 percent forecast in March.
Policy makers said they expect interest rates to stay low for a “considerable time” even after they end their bond-purchase program. The central bank left its target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.
Economy Shrinks
Companies in the U.S. added 205,000 workers in June after hiring 179,000 the previous month, economists forecast before a July 2 report from ADP Research Institute. Labor Department data the following day will show payrolls increased by 210,000 this month, down from 217,000 in May.
U.S. gross domestic product shrank at a 2.9 percent annualized rate in the first quarter, the worst reading since the same three months in 2009, the Commerce Department said June 25. Reports yesterday showed consumer spending rose less in May than economists predicted, and initial claims for jobless benefits were higher last week than analysts forecast.
Traders have cut to 55 percent the chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, down from 66 percent odds at the end of March, fed funds futures showed yesterday.
Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, declined one basis point to 53.25 basis points yesterday. The gauge has dropped from last year’s high of 117.89 set in July.
Premium Shrinks
The extra yield on Australia’s 10-year bonds over similar-maturity Treasuries shrank to 103 basis points, the least since Aug. 1 based on closing levels. The premium was as high as 153 basis points in March.
The Reserve Bank of Australia will leave its key interest rate at 2.5 percent at its next meeting on July 1, according to all of the 29 economists surveyed by Bloomberg News. Bets that policy makers will reduce their benchmark by year-end were 28 percent yesterday, up from 9 percent on June 13, according to swaps data compiled by Bloomberg.
“One of the major driving factors has been pricing for the RBA,” said Zoe McHugh, an interest-rate strategist at Australia & New Zealand Banking Group Ltd. in Sydney. “Our market has outperformed over the week, so definitely the RBA has been a factor,” she said.
To contact the reporters on this story: Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net
To contact the editors responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net Nicholas Reynolds, Naoto Hosoda
