Treasury 10-year notes rose for an eighth day, the longest run of gains since December 2008, as investors sought safety with Spanish debt yields climbing toward levels that prompted other European nations to seek bailouts.
Yields on the benchmark securities dropped to a two-week low as gauges of inflation expectations receded from the highs reached after the Federal Reserve announced a third round of debt purchases, or quantitative easing. Investor demand for a haven pushed the yields on the $35 billion in U.S. five-year notes slated to be sold today close to record auction lows.
“Europe is providing minor fundamental strength for U.S. Treasury valuations,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “The sell-off in mid-September was an overreaction to QE3. This is an overreaction to the overreaction.”
The 10-year yield dropped three basis points, or 0.03 percentage point, to 1.63 percent at 9:45 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.625 percent note due in August 2022 rose 10/32, or $3.13 per $1,000 face amount, to 99 30/32. The yield was at the lowest since Sept. 7. It rose to 1.89 percent on Sept. 14, the highest since May.
An eight-day gain in prices is the longest since the period ended Dec. 4, 2008.
Spanish 10-year bonds slumped, with yields rising the most this month, after Catalan President Artur Mas called early elections yesterday. His bid for greater autonomy came a week after President Mariano Rajoy rejected his demand for increased control of the region’s revenue.
The drop in Spain’s 10-year bond sent the yield up as much as 30 basis points to 6.04 percent. It reached a five-month low 5.6 percent on Sept. 10. Italy’s 10-year yield rose seven basis points to 5.17 percent, moving higher for the fifth straight day. The yield on Portugal’s 10-year debt climbed 13 basis points to 8.87 percent, the highest since it closed on Sept. 5 at 9.1 percent.
German and British government securities rose as investors sought safety. The yield on 10-year German bunds dropped 10 basis points to 1.49 percent, and 10-year U.K. gilt yields decreased 10 basis points to 1.72 percent.
U.S. government securities were the most expensive in three weeks. The 10-year term premium, a model created by economists at the Fed that includes expectations for interest rates, growth and inflation, was negative 0.95 percent, the most costly since Sept. 3. A negative reading indicates investors are willing to accept yields below what’s considered fair value. The average this year is negative 0.74 percent.
Gauges of inflation expectations are subsiding following an initial surge triggered by the Fed announcement of more debt purchases on Sept. 13.
The five-year, five-year forward break-even rate, a measure of inflation expectations the Fed uses to help guide monetary policy, was 2.74. It has fallen from 2.88 on Sept. 14, which was the most in 13 months.
“Every time there’s an action like this, it’s almost like an energy drink,” said Rich Sega, chief investment officer for Conning Inc., which manages almost $87 billion for insurance companies and is based in Hartford, Connecticut. “People get a little ebullient, and then when it wears off, you realize there’s not a fundamental change,” he said on Bloomberg Television’s “First Up” with Zeb Eckert.
Treasuries returned 0.4 percent since the end of June, according to Bank of America Merrill Lynch indexes. German debt gained 0.5 percent, and Japanese government bonds rose 0.4 percent, the data show.
Federal Reserve Bank of Philadelphia President Charles Plosser said yesterday more bond purchases probably won’t boost growth and may jeopardize the central bank’s credibility.
“We are unlikely to see much benefit to growth or to employment from further asset purchases,” he said in a speech at the district bank in Philadelphia. “Conveying the idea that such action will have a substantive impact on labor markets and the speed of the recovery risks the Fed’s credibility.”
The Federal Open Market Committee said on Sept. 13 it will buy mortgage-backed securities at a pace of $40 billion per month until the labor market improves. Policy makers have turned to unconventional tools to tackle unemployment that has stayed above 8 percent since February 2009.
A U.S. government report today will show sales of new homes rose to the most since April 2010, based on a Bloomberg News survey of economists before the Commerce Department reports the number at 10 a.m. New York time.
The central bank is swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on borrowing costs. The Fed plans to buy as much as $5 billion of debt maturing from September 2018 to August 2020 today as part of the program, according to the Fed Bank of New York’s website. The purchases take place at 11 a.m. in New York.
Chicago Fed President Charles Evans is due to speak in Hammond, Indiana today. In a speech last week in Ann Arbor, Michigan, he said the central bank’s expanded easing has the power to make the U.S. economy more resilient.
The five-year notes being sold at 1 p.m. New York time today yielded 0.655 percent in pre-auction trading, versus 0.708 percent at the previous sale of the securities on Aug. 29. The record low auction bid was 0.584 percent on July 27.
Investors bid for 2.92 times the amount offered last month, up from 2.71 times on July 25. The Treasury sold $35 billion of two-year notes yesterday and plans to auction $29 billion of seven-year securities tomorrow. The U.S. is selling $99 billion in notes this week.