Treasuries rose for a second day, with 10-year yields headed for the biggest weekly drop since September, as $85 billion of spending cuts that threatened to slow the world’s largest economy are set to be triggered.
Benchmark 10-year notes extended gains from February as President Barack Obama said after meeting with congressional leaders the reductions will be a “slow grind” on the economy. Treasuries had pared an advance earlier after a gauge of U.S. manufacturing rose to the highest since June 2011. Investors sought safety as Chinese factory growth slowed, the euro-area inflation rate dropped and Italian bonds fell.
“There’s a lot of paralysis going on in D.C.,” said George Goncalves, head of interest-rate strategy at Nomura Holdings Inc., one of 21 primary dealers that trade Treasuries with the Federal Reserve. “It’s not clear yet on how it’s going to go, so people are buying Treasuries first and asking questions later.”
The 10-year yield fell two basis points, or 0.02 percentage point, to 1.85 percent at 1:39 p.m. New York time, according to Bloomberg Bond Trader prices. It lost 11 basis points for the week, the biggest drop since Sept. 28. The 2 percent note due in February 2023 gained 7/32, or $2.19 per $1,000 face amount, to 101 11/32. Thirty-year bond yields declined two basis points to 3.06 percent.
Ten-year yields slid 11 basis points in February, their first drop in three months and the largest since July. They will be at 1.85 percent on March 31 before rising to 2.30 percent by year-end, according to a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
Treasuries trimmed gains after the Institute for Supply Management’s factory index advanced to 54.2 last month, from 53.1 in January, the Tempe, Arizona-based group said today. The figures exceeded the most optimistic forecast in a Bloomberg survey in which the median projection was 52.5. A reading greater than 50 signals expansion.
Commerce Department data showed earlier that consumer spending, which accounts for about 70 percent of the U.S. economy, rose 0.2 percent in January, matching the median estimate in a Bloomberg survey. Incomes slumped 3.6 percent.
U.S. government debt rallied this week after an inconclusive Italian election and as Federal Reserve Chairman Ben S. Bernanke backed the central bank’s bond purchases.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.75 percent today, the most costly level since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Treasury market volatility, as measured by the Bank of America Merrill Lynch MOVE index, declined yesterday to 55.9, the lowest since Jan. 24.
Treasury trading volume dropped yesterday to $286 billion, the lowest level since Feb. 22, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume reached $491 billion on Feb. 1, the highest since August 2011. The average daily volume for 2013 is $302 billion, compared with $238 billion in 2012.
Congress mandated $1.2 trillion in across-the-board spending cuts to begin today and be spread over nine years, as part of a 2011 agreement to increase the U.S. debt limit. Reductions totaling $85 billion are scheduled to take effect in the remaining seven months of this fiscal year. Lawmakers have failed to reach an accord to head them off.
“No one knows how much time we have in terms of the resolution of this,” said Sean Murphy, a trader at Societe Generale in New York, a primary dealer. “We have the potential to grind higher in prices with these concerns. There may be another 10 basis points of steam left.”
Obama said it may take weeks to win over enough lawmakers from both parties to reach a deal on a replacement deficit- cutting plan. He said agreement will be reached once members of Congress hear from voters feeling the pinch of cutbacks in government programs.
Bernanke signaled in congressional testimony this week the Fed is prepared to keep buying bonds at its present pace, as he dismissed concern that record easing risks sparking inflation or asset-price bubbles. The central bank purchases $85 billion of Treasury and mortgage debt a month, putting downward pressure on borrowing costs to fuel growth.
The Fed bought $916 million of Treasuries today maturing from August 2023 to February 2031.
China’s official purchasing managers’ index was 50.1 in February, the weakest in five months and down from 50.4 in January, a report from the National Bureau of Statistics and China Federation of Logistics and Purchasing showed in Beijing. The euro area’s annual inflation rate fell more than economists predicted in February, to 1.8 percent, according to the European Union’s statistics office in Luxembourg.
Italy’s 10-year yield rose six basis points to 4.79 percent today. The Standard & Poor’s 500 Index fell as much as 0.9 percent and gained as much as 0.4 percent.