Treasury 10-year note (CBOT:ZNU13) yields touched a more than one-week low amid speculation Federal Reserve Chairman Ben S. Bernanke will seek to damp investor expectations of a reduction in stimulus when he speaks to Congress tomorrow.
Treasuries erased an earlier gain after the cost of living in the U.S. rose in June by the most in four months as gasoline prices increased. Pacific Investment Management Co.’s Bill Gross added to holdings of U.S. government debt in his flagship fund in June while betting incorrectly on gains in inflation-indexed securities in the first half of 2013.
“The market is anticipating a dovish, defensive presentation -- and if it doesn’t get enough of that, they may see it as hawkish,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co., said of Bernanke’s two days of testimony in Washington. “Inflation is a non-issue and last week he seemed to be more concerned about deflation than inflation. He’s going to lean to the dovish side. The market is already pricing that in.”
The benchmark 10-year yield was little changed at 2.54% as of 10:03 a.m. New York time, according to Bloomberg Bond Trader data. It reached 2.51%, lowest since July 5. The price of the 1.75% security maturing in May 2023 traded at 93 5/32.
As of yesterday, investors in U.S. government securities linked to consumer-price gains have lost 7.7% this year, headed for the first annual decline since 2008, Bank of America Merrill Lynch index figures showed. Conventional Treasuries fell 2.7% over the same period.
The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, a measure of trader expectations for inflation over the life of the debt called the break-even rate, was at 2.09 percentage points, set for the highest close since June 11. That compares with an average of 2.37 percentage points in the past year.
The Fed’s price indicator for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, fell to a two-week low of 2.41% as of July 11.
The consumer-price index increased 0.5% after a 0.1% gain the prior month, a Labor Department report showed today in Washington. The median forecast in a Bloomberg survey called for a 0.3% rise. Overall consumer prices increased 1.8% in the 12 months ended in June, more than projected and after a 1.4% year-over-year gain the prior month. The core measure, which excludes food and fuel, climbed 0.2% from May.
The report “looks fairly strong -- it bodes well for the inflation side of the story,” said Aaron Kohli, an interest- rate strategist in New York at BNP Paribas SA, one of 21 primary dealers obligated to trade with the Federal Reserve. “Break- evens are a good buy at this point.”
Bernanke said on July 10 that the U.S. needs “highly accommodative monetary policy for the foreseeable future,” after last month saying the central bank may begin to slow its $85 billion in monthly bond purchases this year and end them in 2014 if economic growth meets policy makers’ goals.
Industrial production rose in June by the most in four months, with output at factories, mines and utilities climbing 0.3% after being little changed in May, a Fed report showed today in Washington. The gain matched the median forecast of 86 economists surveyed by Bloomberg. Manufacturing, which makes up 75% of total output, increased more than projected.
The U.S. central bank is scheduled to buy as much as $1.75 billion of government securities due from February 2036 to May 2043, according to the New York Fed’s website.
Foreign sales of U.S. long-term securities rose in May as private investors overseas sold a record amount of Treasuries, a government report showed.
The net long-term portfolio investment outflow for the month was $27.2 billion after a revised decline of $21.8 billion the prior month, the Treasury Department said in a statement today in Washington. U.S. residents bought a net $27.2 billion in foreign long-term securities, while investors abroad were net sellers of $29 billion of Treasury bonds and notes, the report showed.
China’s holdings of Treasuries rose $25.2 billion to a record $1.316 trillion, according to the Treasury. Japan, the second-largest holder, lowered its holdings to $1.11 trillion.
Pimco’s Gross raised the proportion of U.S. government debt in the $268 billion Total Return Fund to 38% from 37% in May, according to data on the company’s website. Newport Beach, California-based Pimco doesn’t comment directly on monthly changes in holdings or specific types of securities within a market sector such as the percentage of Treasury Inflation Protected Securities in the U.S. grouping.
Gross had been buying TIPS on a bet that money printing by the world’s central banks would push up consumer prices, making Treasuries the largest portion of the fund. When yields began to rise in May on expectations the Fed would slow its bond-buying program, inflation expectations didn’t, amplifying the losses on inflation-hedged U.S. debt.
The Total Return Fund, the world’s largest mutual fund, fell 4.7% in May and June, prompting $9.9 billion in withdrawals last month, the most on record.
The Treasury is contacting primary dealers as it seeks ways to support the TIPS market. The advice is being sought after direct bidders, non-primary-dealer investors that place their bids directly with the Treasury, bought 0.4% of debt offered in a sale of 30-year TIPS in June. That was the least since 2010, versus 14% in February and an average of 17.7% at the past nine auctions.