Treasury yields fall to records on Europe debt concern, economy

Bond & note futures reach record highs

Technical Measure

U.S. debt pared a second monthly advance earlier as a technical indicator signaled their recent decline was poised to end.

The 14-day relative-strength index for 10-year Treasury yields fell to 28.5 yesterday. A reading less than 30 suggests to some traders that rates have declined too quickly and are set to change direction.

Valuation measures show Treasuries are at the most expensive levels ever. The term premium, a model created by economists at the Fed, touched negative 0.91 percent, the most expensive level ever. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

The U.S. economy grew more slowly in the first quarter than previously estimated, reflecting smaller gains in inventories and bigger government cutbacks.

Economic Pace

Gross domestic product climbed at a 1.9 percent annual rate from January through March, down from a 2.2 percent prior estimate, revised Commerce Department figures showed today in Washington. The report also showed corporate profits rose at the slowest pace in more than three years and smaller wage gains at the end of 2011.

The number of Americans applying for unemployment insurance payments rose last week to a one-month high, a sign that progress in reducing joblessness may be stalling. First-time claims for jobless benefits increased by 10,000 to 383,000 in the week ended May 26 from a revised 373,000 the prior week, the Labor Department said today. The initial claims exceeded the median estimate of 370,000 in a Bloomberg News survey of economists.

“There’s a nervousness about job growth in the spring, so people are placing bets in front of Friday’s payroll number that in general it may not be good,” said Dan Greenhaus, chief global strategist at the broker-dealer BTIG LLC in New York. “If Europe continues to worsen, there’s no reason to think we can’t get to 1.5 percent.”

Jobs Outlook

Economists estimate a Labor Department report tomorrow will show the U.S. added 150,000 jobs in May, up from 115,000 the previous month. The jobless rate held at 8.1 percent, a separate survey showed.

A measure of price-increase predictions used by the Fed to set policy, the five-year, five-year forward break-even rate, which gauges the average inflation rate between 2017 and 2022, was 2.53 percent on May 25, down from a 2012 high of 2.78 percent on March 19. The rate slid nine basis points in April, the biggest monthly decline since December.

The central bank purchase of Treasuries was part of the plan to replace $400 billion of shorter-term debt in its holdings with longer maturities, according to the Fed Bank of New York’s website. The Fed previously expanded its balance sheet by $2.3 trillion in two rounds of bond purchases.

Fed Gathering

Fed policy makers are scheduled to meet in Washington on June 19-20 to consider what to do when the $400 billion maturity-extension program expires in June.

Italy’s prime minister and central bank chief pressed Germany to back more aggressive efforts to snuff out the escalating debt crisis, setting up a south-north showdown over how to stabilize the 17-nation euro economy.

Treasuries underperformed German bonds and U.K. gilts this month, according to the Bank of America Merrill Lynch indexes. German debt made a 2.8 percent profit and gilts returned 3.7 percent, the indexes show.

“It really continues to be the ongoing European saga and the competing headlines, which have driven the market to these record-low yield levels,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The fact that we saw a modest backup overnight is not a surprise, considering how low 10-year yields are.”

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