Treasury 30-year bond yields climbed the most in 10 months during October as U.S. securities fell amid speculation that asset purchases by the Federal Reserve will reignite inflation.
The gap in yields on 30-year Treasury Inflation Protected Securities and comparable U.S. bonds, the breakeven rate that indicates trader expectations for prices over the life of the securities, widened Friday to the most in five months. A sale of five-year TIPS during the week drew the first negative yield at a U.S. debt offering as investors speculated returns will be positive when inflation rises. The Fed meets Tuesday and Wednesday.
“People generally don’t want to fight the Fed,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., one of 18 primary dealers that trade with the central bank. “One area you really don’t want to fight the Fed is TIPS breakevens.”
The yield on the 30-year Treasury bond rose 30 basis points, or 0.30 percentage point, to 3.99 percent, from 3.69 percent on Sept. 30, according to BGCantor Market Data. The 3.875 percent security due in August 2040 dropped 5 9/32, or $52.81 per $1,000 face value to 98 2/32.
Ten-year Treasury yields rose nine basis points to 2.6 percent, from 2.51 percent at the end of last month. They rose for six straight days through Oct. 27 as the securities slid for the longest period since October 2008. Yields on seven-year debt fell two basis points to 1.89 percent.
Treasuries overall lost investors 0.4 percent through Oct. 28, the first monthly decline since a 0.9 percent drop in March, Bank of America Merrill Lynch indexes showed. They’re up 8.3 percent in 2010, reflecting demand for the relative safety of government debt as the U.S. economic recovery faltered. The Standard & Poor’s 500 Index rose 6.1 percent this month.
Thirty-year bonds pared their monthly loss Friday after primary dealer Goldman Sachs Group Inc. said any so-called quantitative easing by the Fed to spur the economy would likely include purchases of the maturity.
Data Friday showed the Fed’s preferred inflation measure rose less than forecast, adding to speculation policy makers will boost asset purchases. The price gauge, a measure of personal consumption that strips out food and energy costs, rose at a 0.8 percent annual pace in the third quarter, less than the 1 percent median forecast in a Bloomberg News survey, according to Commerce Department figures.
U.S. gross domestic product increased at a 2 percent annual rate from July through September, in line with economists’ forecasts, Commerce Department data showed. The pace was 1.7 percent in the second quarter and 3.7 percent in the first.
“We have softer-than-expected inflation data,” said Dan Mulholland, a Treasury trader in New York at primary dealer Royal Bank of Canada. “The GDP is a positive sign going forward, but inflation data will trigger whether or not the Fed does QE.”
The difference between yields on 30-year bonds and comparable TIPS widened 52 basis points to 2.59 percentage points, the most since May 13. The gap between 10-year notes and TIPS increased 33 basis points this month to 2.15 percentage points, the most since May 18.
“Inflation-linked bonds outperformed nominal Treasuries significantly because of expectations that a fresh round of quantitative easing will lead to inflation,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh.
A $10 billion auction of five-year TIPS on Oct. 25 drew a yield of minus 0.55 percent. The bid-to-cover ratio, a gauge of demand that compares the amount bid with the amount offered, was 2.84, above the average of 2.38 at the previous 10 auctions of the security.
The U.S. also auctioned $35 billion in two-year debt, $35 billion in five-year securities and $29 billion in seven-year notes this week. The two- and five-year debt sales also had higher-than-average demand amid speculation the Fed’s efforts may not bring the economy back to full speed quickly.
Policy makers will probably announce this week asset purchases at an initial pace of $75 billion to $100 billion a month, strategists at primary dealer Citigroup Inc. including Brett Rose and Joseph Leary wrote in a note. While they forecast $500 billion to $750 billion in buys over six to nine months, they wrote that the central bank is unlikely to commit to a specific time period.
Other estimates for the ultimate size of an asset-purchase program range from $1 trillion at Bank of America-Merrill Lynch Global Research to $2 trillion at Goldman Sachs. Economists at both firms said the Fed will likely start by announcing $500 billion this week.
A resumption of asset purchases by policy makers would likely include 30-year Treasury bonds, Goldman Sachs said in a note to clients.
Buying 30-year bonds may cause the difference in yield between them and 10-year Treasuries to narrow, Francesco Gazarelli, a London-based analyst at Goldman Sachs, wrote in an e-mailed note. The gap in yields was 1.38 percentage points Friday, versus a five-year average of 0.53 percentage point.
“It’s the first time we’re hearing someone voice the opinion publicly that the Fed’s going to have to do something different in terms of QE,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. “Goldman’s a respected voice on the street saying the Fed’s going to have to go out to 30s to do something.”
© Copyright 2017 Bloomberg News. All rights reserved.