May 17 (Bloomberg) -- The difference between 10-year yields for conventional U.S. government debt and Treasury Inflation- Protected Securities was the smallest since January before a $13 billion auction of inflation-protected notes.
Treasury 10-year yields reached a seven-month low after the index of U.S. leading economic indicators unexpectedly fell in April and a regional manufacturing measure shrank in May. U.S. debt dropped earlier after a report showed Japan’s economy expanded faster than estimated in the first quarter. The TIPS sale may post a record negative yield.
“Given how the market is trading in nominal Treasuries, there’s a lot less inflationary pressure than there was a couple of months ago,” said Alex Li, an interest-rate strategist in New York at Deutsche Bank AG, one of 21 primary dealers that are required to bid at Treasury auctions.
The 10-year yield fell two basis points, or 0.02 percentage point, to 1.74 percent at 10:31 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due May 2022 gained 5/32, or $1.56 per $1,000 face amount, to 100 2/32.
U.S. 10-year yields reached the least since Oct. 4. It reached a record low 1.67 percent on Sept. 23 after a Group of 20 finance chiefs failed to ease concern the global economy was on the brink of another recession.
“The potential for continued global slowdown is still the story, and it limits any selloff in Treasuries,” said Sean Murphy, a trader in New York at Societe Generale SA, a primary dealer. “We’ve had a nice rally since last week and we are getting to a point where we will need a further catalyst to continue to move much lower in yield.”
The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of trader expectations for consumer prices over the life of the debt, reached 2.06 percentage points, the least since Jan. 25. The average during the past decade is 2.15 percentage points.
The 10-year TIPS yield climbed three basis points to negative 0.36 percent. The Treasury’s $13 billion auction of 10- year TIPS on March 22 was priced at a record-low negative 0.089 percent yield.
The Fed’s preferred measure of gauging the outlook for inflation has declined from the almost-seven-month high it reached in March as U.S. economic data began to cool and Europe’s debt problems began to worsen. The five-year, five-year forward break-even rate, which projects the pace of consumer price increases starting in 2017, fell yesterday to a two-month low of 2.50 percent, down from 2.78 percent on March 19.
A measure of the U.S. cost of living was unchanged in April, restrained by a drop in energy prices and supporting the view of some Fed policy makers that inflation will ease. Last month’s consumer-price index matched the median forecast of economists surveyed by Bloomberg News and followed three straight gains that included a 0.3 percent rise in March, the Labor Department said May 15.
The Conference Board’s gauge of the outlook for the next three to six months decreased 0.1 percent after a 0.3 percent gain in March, the New York-based group said today. Economists projected the gauge would rise by 0.1 percent, according to the median of 49 estimates in a Bloomberg News survey.
The Fed Bank of Philadelphia’s general economic index fell to minus 5.8 this month, the lowest reading since September, from 8.5 in the previous month. Economists forecast the gauge would rise to 10, according to the median estimate in a Bloomberg News survey. Readings less than zero signal contraction in the area covering eastern Pennsylvania, southern New Jersey and Delaware.
Japan’s economy expanded an annualized 4.1 percent during the first three months of 2012, more than forecast, boosted by reconstruction spending. The growth rate exceeded all but seven of 27 estimates in a Bloomberg News survey of economists, a Cabinet Office report showed today in Tokyo.
The Fed plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today, according to the Fed Bank of New York’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep down borrowing costs.
Greece’s inability to form a government is fueling concern the nation will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since 2010.
“Investors are flocking to safe assets,” said Bin Gao, head of interest-rate research for Asia and the Pacific at Bank of America Merrill Lynch in Hong Kong. “If we get Greece dropping out of the euro, I see much lower yields for U.S. Treasuries.”