Treasury 10-year notes rose for a second week for the first time since November as the absence of progress toward resolving the impasse on raising the U.S. debt ceiling sustained demand for the safest securities.
The benchmark securities advanced yesterday for the fifth time in six days as the Federal Reserve purchased $8.797 billion of U.S. government securities in five operations as part of its effort to restore growth in the world’s largest economy. House Republicans are weighing a short-term extension of the government’s borrowing authority to spur President Barack Obama into negotiations on spending cuts. The Treasury will sell $15 billion of 10-year inflation-protected securities next week.
“We’re dealing with a gradual refocus of attention toward the debt ceiling,” said Scott Sherman, an interest-rate strategist in New York at Credit Suisse Group AG, one of 21 primary dealers that trade directly with the central bank. “At the same time, let’s not forget the Fed is in the market buying $85 billion a month of mortgages and Treasuries.”
The 10-year note yield fell this week three basis points, or 0.03 percentage point, to 1.84 percent, according to Bloomberg Bond Trader pricing. The 1.625 percent security due in November 2022 gained 7/32, or $2.19 per $1,000 face amount, to 98 1/32.
The 30-year bond yield fell two basis points to 3.03 percent.
The Treasuries market will be closed Monday in observation of the Martin Luther King Jr. holiday.
U.S. government debt remained higher yesterday as the Thomson Reuters/University of Michigan consumer sentiment index dropped to 71.3 in January, the lowest since December 2011, from a five-month low of 72.9 the prior month. Analysts forecast the measure of U.S. consumer confidence would advance to 75 this month, according to a Bloomberg survey.
The consumer-price index was unchanged in December, rising 1.8 percent year-over-year and matching the median estimate of 83 economists surveyed by Bloomberg. It followed a 0.3 percent drop the prior month, according to Labor Department data released Jan. 16. Costs rose 1.7 percent in 2012, the third- smallest annual gain in the past decade and down from a 3 percent increase in 2011.
The bond market is forecasting an inflation rate of 2.5 percent during the next 10 years, as measured by the gap between yields on 10-year government notes and similar maturity Treasury Inflation-Protected Securities. The difference is the most since October, and compares with an average of 2 percent since 2008.
“There’s always the suspicion the Fed will not be able to control inflation,” which has grown as policy makers have expanded their asset purchases, said Marcus Huie, a fixed-income strategist at primary dealer Bank of America Merrill Lynch.
The yield on inflation-indexed 10-year Treasuries reached negative 0.77 percent on Jan. 15, the lowest this year, and ended the week at negative 0.75 percent. Yields on inflation- indexed U.S. debt are negative for all maturities through 2029.
TIPS holders receive an adjustment to the principal value of their securities equal to the change in the consumer price index, in addition to a fixed rate of interest that’s smaller than what’s paid to a holder of conventional debt.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.77 percent on Jan. 16, the most costly since Jan. 1. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Treasuries remained supported as House Republicans discussed the short-term extension of the debt limit during private meetings Jan. 17 at a golf resort outside Williamsburg, Virginia. The lawmakers are seeking a strategy to meet a series of deadlines that Congress will face in the next 90 days.
They include the need to raise the country’s $16.4 trillion debt ceiling next month. The limit has been periodically raised since its creation in 1917. Congress increased the debt ceiling to reflect the cost of World War II, and lowered the level after the war ended.
Since 1960, Congress has raised or revised the limit 79 times, including 49 times under Republican presidents, according to the Treasury Department, noting the U.S. has never defaulted on its obligations.
Congress will also confront in March the $110 billion in automatic spending cuts, half from defense, that were put off in the Jan. 1 tax deal. On March 27, a short-term measure that funds government agencies will also lapse, creating another potential fight.
“They still want to fight it out,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “A series of temporary measures may continue. This is going to continue for a while and it will keep us in a range -- 1.8 to 1.9 percent.”
The Federal Open Market Committee has pushed its benchmark target for short-term interest rates almost to zero and expanded Fed assets to a record $2.97 trillion to fuel growth and reduce 7.8 percent unemployment. Policy makers debating whether to continue stimulus this year will next meet Jan. 29-30.
Hedge-fund managers and other large speculators decreased their net-long position in 10-year note futures in the week ending Jan. 15, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, outnumbered short positions by 27,298 contracts, falling by 17,508 contracts, or 39 percent, from a week earlier, the Washington-based commission said.
Large speculators decreased their net-short bets on 30-year bonds, with speculative short positions, or bets prices will fall, outnumbering long positions by 5,373 contracts. Net-short positions fell by 2,076 contracts, or 28 percent, from a week earlier.
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