Treasuries rose, with 10-year yields reaching a three-week low, as Federal Reserve minutes damped bets policy makers are moving toward raising interest rates and a decline in Chinese exports boosted safety demand.
The 10-year yield will end the second quarter at 2.95 percent, according to economists’ forecasts in a Bloomberg News survey conducted April 4 to 9, down from the prediction for 3 percent in a survey held March 7 to 12. The difference between yields on five- and 30-year debt reached a three-week high after falling to the least since 2009 last month. Thirty-year bonds rose before the Treasury sells $13 billion of the debt today, the last of three auctions of coupon-bearing debt this week.
“The market reacted big to the FOMC minutes,” said Justin Lederer, an interest-rate strategist at Cantor Fitzgerald LP in New York, one of 22 primary dealers that trade with the Fed. “We were more in a flattening bias given the expected rate hikes. A lot of the flatteners got unwound. I don’t think you’ll see a 2 percent five-year note just yet.”
The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.67 percent at 10:15 a.m. in New York, according to Bloomberg Bond Trader prices, after dropping to 2.65 percent, the lowest since March 17. The 2.75 percent note due in February 2024 rose 6/32, or $1.88 per $1,000 face amount, to 100 22/32.
The yield on the five-year note dropped to as low as 1.59 percent, the least since March 19. It touched 1.81 percent on April 4, the highest since September.
The gap between five- and 30-year yields reached 197 basis points after dropping to 178 basis points on March 31.
Benchmark 10-year securities rose as investors re-priced projections for when the central bank will increase borrowing costs after members of the Federal Open Market Committee at its March 18-19 meeting said “the increase in the median projection overstated the shift in the projections,” according to minutes released yesterday.
Traders’ wagers put the likelihood the Fed will start raising rates in July 2015 at 63 percent, based on futures trading on the CME Group Inc.’s exchange. The chances for a raise increase in June 2015 fell to 41 percent, compared with 54 percent on April 4.
“The market is undergoing a re-pricing of the curve, given the fact that it’s pushing out the lower for longer theme,” said Sean Murphy, a trader in New York at primary dealer Societe Generale SA. “We’re seeing a correction occurring in the curve.”
The central bank has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. Policy makers are in the process of unwinding the bond-purchase program it has used to help support the economy.
Fed Chair Janet Yellen suggested last month the central bank may raise its benchmark rate in the middle of 2015. In forecasts released with the policy statement in March, officials upgraded projections for gains in the labor market and predicted the main interest rate will rise to 1 percent by the end of 2015, higher than previously forecast.
The central bank is scheduled to purchase $2.75 billion to $3.5 billion of Treasuries maturing from April 2018 to December 2018. The operations are part of the Fed’s debt purchases aimed at keeping long-term rates low and supporting economic growth.
Treasuries remained higher today even as a report showed jobless claims decreased by 32,000 to 300,000 in the week ended April 5, the lowest since May 2007, the Labor Department said in Washington.
The securities were supported earlier by a report that China’s exports fell 6.6 percent from a year earlier, the customs administration said, attributing the decline partly to distortions from inflated data in early 2013. Imports dropped 11.3 percent, leaving a trade surplus of $7.71 billion.
“Investors are buying bonds for safety,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “There’s a risk-off trade” in the financial markets, he said.
The Treasury last sold 30-year securities on March 13 at a yield of 3.63 percent, compared with 3.69 percent in February. Investors bid for 2.35 times the amount of debt available, versus 2.27 times the previous month. The 30-year bonds scheduled to be sold today yielded 3.56 percent in pre-auction trading.
The U.S. sold $30 billion of three-year notes on April 8, and $21 billion of 10-year securities yesterday.
Thirty-year bonds are the best-performing Treasuries this year, having returned 8.1 percent through yesterday, according to Bank of America Merrill Lynch indexes. Ten-year notes gained 3.8 percent.
The FOMC minutes lowered the probability of a near-term hawkish re-pricing of Fed policy expectations, Morgan Stanley said in report today. The bank ended a suggested position betting the gap between the yield on the five-year note and the 30-year bond would narrow.
The company recommended ending short positions in five-year securities embedded in the twos, fives and 10s butterfly-index spread and the twos, fives and 30s butterfly-index gap. The butterfly-index spread measures how current five-year notes are performing against the other securities. A short position is a bet the price of a security will drop.
Morgan Stanley also suggested ending a bet on the spread narrowing between the yields on two-year notes and 30-year bonds.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., decreased its holdings of government-related securities in March.
The proportion of the debt in the $232 billion Total Return Fund was cut to 41 percent, the company’s website showed yesterday, from 43 percent in February. Mortgage-bond holdings were reduced to 23 percent, the lowest level since June 2011, from 29 percent in February. The fund lost 0.6 percent last month, according to data compiled by Bloomberg.
--With assistance from Eshe Nelson in London.