Treasury (YCGT0025) 10-year note yields dropped the most since January as slowing growth in China and Europe and an uneven recovery in the American housing market rekindled the refuge appeal of U.S. government securities.
Yields on the benchmark notes declined from the almost five- month high reached after the Federal Reserve upgraded its economic outlook last week, prompting traders to unwind bets for more monetary stimulus. Treasuries rallied even the U.S. prepared to auction $99 billion in two-, five- and seven-year securities next week.
“We continue to hear that we have turned the corner and we are starting to get a lot of upbeat data, but with Europe and a possible slowdown in China hanging over our heads, it tempers some of the optimism,” said Paul Montaquila in San Ramon, California, head of fixed-income trading at Bank of the West. “We’ve seen a bit of an overreaction in the sell-off.”
Yields on 10-year notes declined six basis points, or 0.06 percentage point, the most in a week since Jan. 27, to 2.23 percent in New York, according to Bloomberg Bond Trader prices. They gained 27 basis points the previous week. The 2 percent securities due in February 2022 rose 17/32, or $5.31 per $1,000 face amount, to 97 30/32.
Ten-year yields are still below 2011’s high of 3.77 percent. They’ll increase to 2.53 percent by year-end, according to the average forecast in a Bloomberg survey of banks and securities companies, with the most recent projections given the heaviest weightings.
Below Moving Average
Thirty-year bond yields slid 10 basis points this week, the most since Jan. 13, to 3.31 percent. They dropped below their 200-day moving average of 3.3343 percent yesterday, indicating this month’s slump in bond prices may be drawing to a close, after rising above the average on March 14.
“That the breaking the 200-day moving average didn’t propel us to sell off further is signaling a rejection of the rising yield trend,” said David Ader, head of U.S. government- bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The market has readjusted the range in the recent steep selloff, and now the market is pausing to reinvestigate.”
The yield difference between 10-year notes and Treasury Inflation Protected Securities shrank for the first week since the five days ended March 2 as investors bet surging oil prices will weigh on growth rather than fuel inflation. The spread, which indicates traders’ outlook for annual consumer-price increases over the next decade, was 2.37 percent yesterday after reaching a seven-month high of 2.45 percent on March 20.
This week’s drop in Treasury 10-year yields reversed a nine-day climb, the longest run of increases since 2006, as the Fed on March 13 raised its assessment of the economy. The improved outlook reduced bets the central bank will buy more debt under quantitative easing and fueled investor appetite for riskier assets.
“Clearly yields moved on the idea we were closer to the end of accommodative policy, but that position is ahead of itself,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “Growth concerns are re- emerging. For the moment, people as less sure that the Fed is on the way out.”
The central bank bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011 to spur growth. It reiterated on March 13 a pledge to keep interest rates at virtually zero through at least late 2014.
Forward markets for overnight index swaps, whose rate shows what traders expect the federal-funds effective rate to average over the life of the contract, signaled a quarter-percentage advance around October 2013 to November 2013, according to data compiled by Bloomberg as of yesterday. Last week, traders were pricing in an increase in September to October of that year.
Valuation measures show government debt has become more expensive. The term premium, a model created by economists at the Fed, increased to negative 0.39 percent yesterday after reaching negative 0.26 percent on March 19, the least expensive since October. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Treasuries extended an advance yesterday after a Commerce Department report showed sales of new homes in the U.S. dropped in February for a second month. They fell 1.6 percent to a 313,000 annual pace, the slowest since October, from a 318,000 rate in January, department figures showed. The median estimate in a Bloomberg News survey was for an increase to 325,000.
China, Euro Region
The Conference Board said in Beijing its leading economic index for China, the world’s second-biggest economy, rose 0.8 percent last month to 227.2 in a preliminary reading. That compared with a 1.5 percent gain in January.
Treasuries also rose as London-based Markit Economics said on March 22 in an initial estimate that a euro-area composite index based on a survey of purchasing managers in services and manufacturing dropped to 48.7 this month from 49.3 in February. The median forecast in a Bloomberg survey of economists was for a gain to 49.6. A reading below 50 shows contraction.
German 10-year bunds advanced as investors sought safety, pushing the yields down 19 basis points for the week to 1.87 percent. The yield difference between bunds and 10-year Treasuries yesterday matched the widest in more than a year, 37 basis points, the most since February 2011.
“It’s impossible to stay insulated against any other slowdown in the rest of the world,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “That bodes well for bonds.”
Crude oil surpassed $108 a barrel yesterday for the first time in four days, raising concern it may weigh on economic growth. The average price over the past decade is $65 a barrel.
The Treasury will auction $99 billion in notes next week: $35 billion of two-year securities on March 27, the same amount of five-year debt on the following day and $29 billion of seven- year notes on March 29. The amounts are the same as the last time the government sold the securities, in February.
The U.S. drew a record low negative yield March 22 at a sale of $13 billion of 10-year Treasury Inflation Protected Securities. The offering yielded negative 0.089 percent, the second sale of 10-year inflation-linked notes in a row at which it was less than zero.
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