Treasury yields were six basis points from the record low before a government report that economists said will show growth in U.S. gross domestic product slowed and inflation cooled.
The five-year, five-year forward break-even rate, a measure of inflation expectations that the Federal Reserve uses to guide monetary policy, fell to 2.39 percentage points on July 24, the lowest level in four months and below the average of 2.75 for the past decade.
“Treasury bond yields will decline further,” said Hiromasa Nakamura, who invests in Treasuries in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $42 billion and is part of Japan’s third-biggest bank. “The economy is very fragile. Inflation is subdued.”
Benchmark 10-year yields were little changed from yesterday at 1.44 percent as of 1:08 p.m. in Tokyo, according to Bloomberg Bond Trader data. The all-time low was 1.38 percent set July 25. The 1.75 percent note due in May 2022 traded at 102 26/32 today.
Nakamura favors longer maturities, those that will rally most if yields fall. He switched his forecast for 10-year rates at year-end to 1 percent from 1.2 percent.
Japan’s 10-year rate increased one basis point, or 0.01 percentage point, to 0.74 percent today. This week it was as low as 0.72 percent, a level not seen since 2003.
U.S. GDP probably expanded at a 1.4 percent annual rate in the second quarter, after a 1.9 percent gain in the first, according to a Bloomberg News survey of economists before the Commerce Department reports the figure today.
A measure of inflation that is tied to consumer spending and strips out food and energy costs, may have climbed at a 1.8 percent annual pace, compared with 2.3 percent in the previous quarter, a separate survey showed. Federal Reserve officials have defined their inflation target as 2 percent a year.
Treasuries have returned 1.4 percent this month as of yesterday, reflecting demand for U.S. debt as a haven from slowing growth and surging yields in Europe amid that region’s sovereign crisis.
For 2012, U.S. government securities have gained 3.1 percent, versus 5.3 percent for the MSCI All-Country World Index of stocks.
Treasuries fell yesterday after European Central Bank President Mario Draghi said the ECB will defend the euro, damping demand for the safest assets.
“Within our mandate, the ECB is ready to do whatever it takes to preserve the euro,” Draghi said during a speech in London. “And believe me, it will be enough.”
Yields on Spanish debt dropped after they climbed to euro- era records earlier in the week on concern the government will need to ask for an international bailout.
“Draghi comments have the potential to be a game changer,” said Peter Jolly, the Sydney-based head of market research at National Australia Bank Ltd. (NAB), the nation’s largest lender as measured by assets. “Our sense is that yields are probably not justified at these levels.”
Ten-year rates will climb to 2 percent by Dec. 31, he said.
The U.S. central bank plans to sell as much as $8 billion of Treasuries due from May 2015 to September 2015 today, according to the Fed Bank of New York website. The sales are part of the bank’s effort to swap short-term Treasuries in its holdings for those with greater maturities, supporting the economy by putting downward pressure on long-term borrowing costs.
“Most investors judge that it is going to be hard for the Fed to keep U.S. rates down forever and any good news from here could lead to a reversal,” George Goncalves, the head of rates research at Nomura Securities International Inc., wrote in a report yesterday. The company is one of the 21 primary dealers that trade directly with the Fed.
The 1.4 percent gain projected for today’s GDP report may add pressure on companies to cut workers, said Tony Crescenzi, a strategist at Newport Beach, California-based Pacific Investment Management Co., home to the world’s biggest bond fund.
“Readings below 1 1/2 percent are in danger territory because they suggest stall speed,” Crescenzi told Susan Li on Bloomberg Television’s “First Up.”
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