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.
U.S. government securities returned 1.1% in April as of yesterday, according to Bank of America Merrill Lynch indexes. The S&P 500 gained 1.7% including reinvested dividends, data compiled by Bloomberg show.
Fed purchases have held down both yields and volatility. Bank of America Merrill Lynch’s MOVE index measuring price swings was 49.65 basis points yesterday. It set a record low of 49.39 last week.
The Fed plans to purchase as much as $5.25 billion of securities maturing between April 2017 and December 2017 today, according to the New York Fed’s website. The central bank is buying $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on borrowing costs. It spent $2.3 trillion on Treasury and mortgage-related debt from 2008 to 2011 in the first two rounds of its policy known as quantitative easing.
Several Fed officials said the central bank should begin tapering its bond-buying program this year and stop it by year- end, minutes of their March 19-20 meeting showed.
U.S. employment and manufacturing expanded less in March than economists surveyed by Bloomberg News predicted, while retail sales and durable goods orders dropped. Gross domestic product expanded at a 2.5% annual rate in the first quarter, less than the 3% expansion forecast by economists in a Bloomberg survey.
Hiring increased while manufacturing growth slowed, reports this week will show, based on responses from economists. Data today will indicate consumer confidence rose, according to a surveys.
“For now, there’s a really good tone to the Treasury market,” said Sean Murphy, a trader at Societe Generale SA in New York, a primary dealer. “All the talk of the Fed tapering has been pushed back to early next year --or later rather than sooner.”