Treasuries rose for a fourth day before a report that economists said will show manufacturing in the Philadelphia region shrank this month, underpinning demand for the safest assets.
Ten-year notes extended their run of gains to the longest in four weeks after purchasing managers indexes indicated both Chinese and euro-area manufacturing contracted in September. The benchmark yields climbed last week to the highest level since May after the Federal Reserve announced further stimulus. Ten-year Treasury Inflation Protected Securities rose even as the U.S. prepared to sell $13 billion of the securities.
“We’re talking about risk-off today with weaker China PMI numbers,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 21 primary dealers that are required to bid at Treasury debt auctions. “The market got overdone last week and needed a little time to reprice.”
The 10-year yield declined three basis points, or 0.03 percentage point, to 1.74 percent at 9:21 a.m. in New York, according to Bloomberg Bond Trader prices. It touched 1.89 percent on Sept. 14. The 1.625 percent security maturing in August 2022 gained 9/32, or $2.81 per $1,000 face amount, to 98 31/32. The four-day advance is the longest since the period ended Aug. 23.
Thirty-year bond yields fell four basis points to 2.92 percent and touched 2.90 percent.
Struggle Seen
U.S. government securities are rallying amid speculation the world’s biggest economy will struggle even as the Fed tackles the slowdown with a third round of bond purchases under quantitative easing and other actions.
The Fed Bank of Philadelphia’s general economic index will be negative 4.5 for September, according to a Bloomberg News survey. The Conference Board’s gauge of the outlook for the next three to six months fell 0.1 percent in August, after increasing 0.4 percent in July, a separate survey showed. The reports will be released at 10 a.m. New York time.
“Markets are not optimistic about today’s data, and so the Treasury market is supported,” said Ralf Umlauf, a research analyst at Landesbank Hessen-Thueringen in Frankfurt. “There’s a bit of snapback after the rise in yields we saw last week.”
Ten-year yields are likely to extend declines in the short- term before rising to 2.10 percent by year-end, Umlauf said.
The Labor Department reported that more Americans than forecast filed applications for unemployment benefits last week. Jobless claims decreased by 3,000 in the week ended Sept. 15 to 382,000, department figures showed today in Washington. The median forecast of 49 economists surveyed by Bloomberg projected 375,000.
A preliminary index of China’s manufacturing was 47.8 for September, versus 47.6 last month, according to HSBC Holdings Plc and Markit Economics. A similar index of euro-area manufacturing was 46 this month, versus 45.1 in August, separate data showed. Readings less than 50 indicate contraction.
The yield on 10-year TIPS fell two basis points to negative 0.80 percent after declining to an all-time low negative 0.86 percent on Sept. 17. The yield hasn’t closed above zero this year, signaling investors who hold the securities to maturity will receive less than they paid to buy them, after accounting for the rate of inflation over the period.
Investors bid for 2.62 times the amount of debt offered at the previous sale of the securities on July 19.
An index of TIPS has returned 0.5 percent this month as of yesterday, according to Bank of America Merrill Lynch indexes. The U.S. Treasury Master Index has fallen 1 percent over the same period, the gauges show.
Inflation Bets
Fed Bank of Dallas President Richard Fisher said yesterday the central bank’s asset purchases have led to an increase in market expectations for quicker inflation. The Fed said last week it would buy $40 billion of mortgage-based securities a month to put downward pressure on borrowing costs.
The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, widened to 2.73 percentage points on Sept. 17, the most in six years.
“Demand for TIPS will remain strong,” Mikael Nilsson, an analyst at Barclays Plc’s investment-banking unit in London, wrote today in a note to clients. “Investors will continue to diversify some of their nominal exposure into real assets in light of the unconventional and dovish Fed monetary policy.”
The central bank is also swapping shorter-term Treasuries in its holdings with those due in six to 30 years. It plans to sell as much as $8 billion of debt maturing from June to August 2015 today as part of the program, according to Fed Bank of New York’s website.
Investors should favor shorter maturities because they will fall less if inflation quickens, said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $73.1 billion in assets.
“The Fed may allow some inflation,” he said. “The actual rate is stable, but inflation expectations are going up.”
The Treasury is scheduled to announce today the size of two-, five- and seven-year auctions scheduled for next week.
