Treasury 10-year note yields traded at almost two-month lows as President Barack Obama meets with lawmakers to resolve the so-called fiscal cliff.
Treasuries headed for a fourth weekly gain, the longest stretch of gains since July. Volatility in Treasuries dropped to a five-year low yesterday. The central bank plans to buy as much as $5.25 billion of Treasuries due from February 2021 to November 2022 today.
“We’re subject to headlines coming out of Washington on this whole process that will inform investor confidence,” said Chris Ahrens, an interest-rate strategist at UBS AG in Stamford, Connecticut, one of the 21 primary dealers that trade with the Federal Reserve. “We don’t know how that’s going to be resolve. There’s more risk that yields will go lower than spike dramatically higher.”
The benchmark 10-year yield was little changed at 1.59 percent at 9:21 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 was at 100 10/32. The yield has declined two basis points this week.
Bank of America Merrill Lynch’s MOVE index, which measures price swings on Treasuries based on options, dropped to 55.6 yesterday, the lowest level since June 2007.
Debt Returns
U.S. government securities were set to outperform corporate bonds on a monthly basis for the first time since May. Treasuries have returned 0.7 percent this month as of yesterday, versus a 0.2 percent loss for company bonds, Bank of America Merrill Lynch indexes show.
U.S. bonds have been supported since President Barack Obama’s re-election on Nov. 6 as investors turned their attention to the fiscal cliff, the $607 billion of tax increases and spending cuts that will automatically come into force at the beginning of 2013 unless lawmakers act.
Yields show inflation expectations are falling.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, touched 2.34 percentage points today, the least since Sept. 7. The average over the past decade is 2.18 percentage points.
The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, fell to 2.73 percent on Nov. 13, the most recent figure available in data compiled by Bloomberg, from 2.88 percent on Oct. 31.
Consumer prices increased 2.2 percent in October from the year before, the Labor Department reported yesterday. Inflation, as measured by this gauge, has averaged 2.5 percent over the past decade, after rising to as high as 14.8 percent in 1980.
Applications for jobless benefits climbed by 78,000 to 439,000 last week, the highest level since April 2011, the Labor Department said yesterday.
Israel’s Defense Minister Ehud Barak signaled his nation may escalate its military operations against Gaza, bolstering demand for safety of government debt.
Egypt’s prime minister Hisham Qandil visited Gaza and said the Arab world was united behind Palestinians there, as Israel extended its aerial assault and militant groups kept up their barrage of rockets fired at the Jewish state.
Asset Flows
International purchases of U.S. financial assets plunged in September as confidence grew that Europe was beginning to solve its debt crisis.
Net buying of long-term equities, notes and bonds totaled $3.3 billion during the month, down from net purchases of $90.3 billion in August, the Treasury Department said today in Washington. Economists surveyed by Bloomberg projected net buying of $50 billion of long-term assets, according to the median estimate.
China remained the biggest foreign owner of U.S. Treasuries in September after its holdings rose $300 million to $1.16 trillion, according to the Treasury.
Industrial production in the U.S. unexpectedly declined in October as Hurricane Sandy knocked out power in the Northeast.
Output at factories, mines and utilities dropped 0.4 percent last month after a revised 0.2 percent increase in September that was smaller than previously estimated, Federal Reserve data showed today in Washington. Economists forecast a 0.2 percent gain, according to the Bloomberg survey median. The Fed said the storm cut total production by almost 1 percentage point.
