Treasuries rose, pushing 10-year yields to the lowest level this year, after a private report showed business activity in the U.S. unexpectedly shrank in April for the first time in more than three years.
Treasuries extended a third monthly gain amid speculation the Federal Reserve will affirm its commitment to its bond-purchase program at a two-day meeting starting today. Benchmark 10-year yields have declined the most in almost a year during April, as signs the U.S. economy is stalling boosted demand for the safest government securities. Treasuries still lagged behind the Standard & Poor’s 500 Index of stocks for a fifth month, as falling yields led investors to look for greater returns outside the sovereign-debt market.
“We are pretty priced here for tapering being pushed off a few months,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “The recent softening of the tone and the change in data and the rally in stocks indicates they expect the Fed will continue. The surprise would be if they would talk about extending it.”
The benchmark 10-year yield dropped three basis points, or 0.03 percentage point, to 1.64% at 10:11 a.m. New York time, according to Bloomberg Bond Trader prices. The 2% note due in February 2023 gained 9/32, or $2.81 per $1,000 face amount, to 103 1/4.
The yield reached the lowest level since Dec. 12 and has dropped 19 basis points this month, the most since June.
The 10-year break-even rate, a measure of inflation expectations derived from the difference between yields on conventional U.S. debt and Treasury Inflation Protected Securities, was at 2.34 percentage points, down from a 2013 high of 2.6 percentage points on Feb. 4. It touched a 2013 low of 2.25 percentage points on April 18.
“Perhaps there will be an acknowledgment of the recent slowing in inflation and softening in growth” at the Fed meeting, said Tom Simons, an economist in New York at Jefferies LLC, one of the 21 primary dealers that trade with the Fed.
The MNI Chicago Report’s business barometer fell to 49 in April, the lowest since September 2009, from 52.4 last month. The median forecast of 51 economists surveyed by Bloomberg was 52.5.
The difference between the yields on two-year and 10-year notes, called the yield curve, narrowed to 1.44 percentage points, approaching the 2013 low of 1.42 percentage points reached April 23, indicating the market is priced for slower economic growth. It averaged 1.48 percentage points during the past year.