Treasuries rose for the first time in three days amid speculation the start of $85 billion in automatic federal spending reductions tomorrow will choke off the recovery in the world’s biggest economy.
Bonds pared gains after a U.S. business barometer unexpectedly rose. Treasuries advanced earlier as revised data showed U.S. gross domestic product grew less than forecast in the fourth quarter. Benchmark 10-year notes rose for the first month since November as the prospect of fiscal cuts that harm growth, known as sequestration, boosted the case for the Federal Reserve to maintain asset purchases.
“It’s pretty well baked into the cake that no action is likely to be taken on the sequestration tomorrow,” said Thomas Simons, a government debt economist in New York at Jefferies Group Inc., one of 21 primary dealers that trade with the Fed. “GDP was weaker than expected. It’s nice to see the negative sign go away, but it’s still pretty weak.”
The U.S. 10-year yield dropped two basis points, or 0.02 percentage point, to 1.88% at 11:09 a.m. in New York, according to Bloomberg Bond Trader prices. The 2% note due in February 2023 rose 5/32, or $1.56 per $1,000 face amount, to 101 1/32. The yield fell to 1.84% on Feb. 26, the lowest level since Jan. 24.
Thirty-year bond yields declined one basis point to 3.09%.
Yield Curve
The difference between the yields on two-year and 10-year notes, called the yield curve, narrowed to 1.64 percentage points, approaching the 1.63 percentage-point level reached Feb. 25, the smallest on a closing basis since Jan. 24. It dropped from a 2013 high of 1.76 percentage points reached on Feb. 19.
Treasuries have returned 0.5% this month as of yesterday, after losing 1% in January, according to Bank of America Merrill Lynch indexes. They have declined 0.4% this year. German bonds gained 1.3% in February.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.72%, almost the most costly since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
The U.S. central bank is buying $85 billion of Treasury and mortgage-backed securities each month in an effort to spur the economy and cut a jobless rate that was 7.9% in January.
“The Fed will continue to deliver quantitative easing and the most important risk is that they could even extend,” said Patrick Jacq, a senior fixed-income strategist BNP Paribas SA in Paris. “Once there is evidence fiscal policy is weighing on growth, then the Fed probably will have to remain very dovish. The risk of yields pushing higher is very limited.”
Far Apart
U.S. lawmakers are far apart on alternatives to the reductions totaling $1.2 trillion over nine years, $85 billion of which would occur in the remaining seven months of this fiscal year. The cuts may lower gross domestic product by 0.6 percentage point and cost 750,000 jobs by the end of 2013, according to the Congressional Budget Office.
Democrats say tax increases must be part of a replacement plan, which Republican leaders oppose. Democrats say they expect the public to place more blame on Republicans, rather than President Barack Obama, for any reduced federal services.
Fed Chairman Ben S. Bernanke said yesterday the central bank’s easing policies are helping to improve demand for homes and cars by lowering long-term interest rates.
The bank bought $1.45 billion today of securities maturing from February 2036 up to August 2042. It will announce its March schedule of purchases at 2 p.m.
U.S. GDP
The U.S. economy grew at a 0.1% annual rate from October through December, up from a previously estimated 0.1% drop, revised figures from the Commerce Department showed today in Washington. The median forecast of 83 economists surveyed by Bloomberg called for a 0.5% gain.
Treasury gains were tempered as the MNI Chicago Report business gauge rose to 56.8, the highest level since March, after a reading of 55.6 in January. Numbers greater than 50 signal expansion. The median forecast of 51 economists surveyed by Bloomberg was for 54.
Initial claims for jobless benefits in the U.S. decreased by 22,000 to 344,000 last week, the Labor Department said in Washington. The median forecast of 44 economists surveyed by Bloomberg called for 360,000 applications.
Ten-year yields will fall to 1.85% by March 31 and rise to 2.31% by year-end, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
Italian Debt
Treasuries trailed their Italian and Spanish counterparts today amid speculation Italy’s lawmakers will set aside their differences and form a coalition government, reducing demand for the U.S. and German government bonds as havens.
The Italian 10-year yield fell as much as eight basis points to 4.74%, while Spain’s dropped 10 basis points to 5.13%.
“Everything is firming up again,” said Michael Franzese, senior vice president of fixed-income trading at ED&F Man Capital Markets in New York. “It looks like Europe is not as bad as it was going to be.”
The yields climbed earlier this week as Italian parliamentary elections Feb. 24-25 failed to give any party a clear majority. That cast doubt on the stability of the next government and spurred bets the country’s commitment to austerity may be diluted, worsening Europe’s debt crisis.
