Treasury 30-year bond yields traded at almost a 13-month low as investors bet the end of the Federal Reserve’s bond-buying won’t spark inflation concern.
The extra yield on the long bonds over five-year notes stayed close to the least since February 2009 after a government report yesterday showed consumer prices rose 0.3 percent in June after a 0.4 percent advance in May. The U.S central bank may keep interest rates at zero for longer than anticipated as inflation stays muted and the jobs recovery remains slow, the International Monetary Fund said. Bond-market volatility fell to almost the lowest in a year.
“U.S. Treasurys look pretty appetizing to a lot of investors, given the low yields in Europe,” said Jason Rogan, managing director of U.S. government trading at Guggenheim Securities, a New York-based brokerage for institutional investors. “Economic data, while better, has not been stellar, The Fed is still relatively dovish and geopolitical risk has helped exacerbate the rally.”
The 30-year yield was little changed at 3.26 percent at 3:33 p.m. New York time, according to Bloomberg Bond Trader data. The price of the 3.375 percent bond due in May 2044 was at 102 1/8. The yield dropped to 3.24 percent on July 21, the lowest level since June 7, 2013.
The yield on 10-year Treasury notes was also little changed at 2.47 percent.
The Bloomberg Global Developed Sovereign Bond Index approached the highest in more than a year yesterday as investors assessed reaction to the downing of a Malaysian plane in Ukraine and conflict in the Gaza Strip.
The IMF cut its U.S. growth forecast for this year to 1.7 percent from 2 percent predicted in June, citing a first-quarter contraction, after a 1.9 percent advance last year. The fund left its 2015 forecast at 3 percent, the fastest expansion since 2005.
“Even with that relatively good growth outlook, we still see there’s a lot of slack in the economy,” Nigel Chalk, deputy director of the IMF’s western hemisphere department, said today on a conference call.
The gap in yields between five- and 30-year Treasurys was 161 basis points, or 1.6 percentage points, after narrowing to 157 basis points yesterday. Shorter maturities are more sensitive to what the Fed does with interest rates, while longer-dated debt is more influenced by the outlook for price growth.
Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasurys based on options, fell yesterday to 53.8 basis points, approaching the lowest level since May 2013.
Traders see about a 46 percent chance that the central bank will have raised its goal for overnight lending between banks to at least 0.5 percent by June, based on futures contracts. The Fed has kept its target in a range of zero to 0.25 percent since December 2008.
The Fed’s target for inflation is 2 percent, as measured by the Commerce Department’s personal consumption expenditures price index. The gauge increased 1.8 percent in May from a year earlier, based on the latest data.
The difference between yields on U.S. 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was little changed at 221 basis points. The average for the past decade is 220 basis points.
“There wasn’t the inflation spook that guys were looking for,” said Sean Murphy, a trader in New York at the primary dealer Societe Generale SA. “You have duration needs coming from overseas and domestic. You have a Fed that’s in motion and that affects the intermediate sector more than the back end.”
The Treasury is scheduled to sell $15 billion of 10-year TIPS tomorrow.
Ten-year yields are poised to rise because investors are “not prepared” for how soon and how quickly the Fed will increase interest rates, leaving the market “badly mispriced,” said Zach Pandl, a portfolio manager and strategist at Columbia Management Investment Advisers LLC.
Policy makers will probably start increasing their benchmark in the second quarter of next year, bringing it to 3.75 percent or 4 percent in 2017 to 2018, Pandl said in an interview in Singapore. The 10-year yield will be more than 3 percent by year-end, he said. Columbia Management, based in Boston, had $358 billion under management as of March 31.
Fed officials have said their bond-purchase program would end with a final reduction of $15 billion in buying at their October meeting if the economy progresses as they expect. At its June meeting, the central bank continued cutting the monthly pace of asset purchases, reducing it by $10 billion for a fifth straight meeting, to $35 billion.
With short-term notes anchored by the Fed’s benchmark interest rate, longer-term yields fell during the past two days as investors sought the safety of Treasurys.
Malaysian transportation officials yesterday took custody of the black boxes from downed Flight MH17, and the Netherlands declared a day of mourning in preparation for the arrival of the first bodies from Ukraine.
Diplomats stepped up pressure on Hamas to accept a cease-fire in Gaza. U.S. Secretary of State John Kerry, who’s in Cairo to promote the Egyptian plan for a truce, said yesterday Hamas has “a fundamental choice to make.”
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