Treasuries were little changed after a report showed durable-goods orders climbed in March more than forecast, adding to evidence the economy is strengthening.
Investors have reduced the gaps between note and bond yields in 2014 as they bet Federal Reserve rate increases in coming years in reaction to faster economic growth will hurt shorter maturities, while a low inflation outlook will benefit longer-term debt. The difference between seven- and 30-year Treasury yields reached the narrowest level since 2009 before the U.S. auctions $29 billion of 2021 notes today.
“We had a pretty solid durable-goods report,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “The market is responding a little bit bond-unfriendly.”
Benchmark 10-year note yields were little changed at 2.70 percent at 9:44 a.m. in New York, according to Bloomberg Bond Trader prices. The price of the 2.75 percent note maturing in February 2024 traded at 100 13/32. The yield rose as much as three basis points.
The seven-year yield was at 2.28 percent, while that on 30- year bonds was 3.48 percent. The spread between seven- and 30- year debt shrank to as little as 1.19 percentage points, the least since October 2009.
Seven-year securities returned 2.1 percent this year through yesterday, while long bonds earned 10.2 percent, Bank of America Merrill Lynch indexes show.
“In the past couple of months the very long end of the U.S. curve has performed very well,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “Shorter yields are pretty fair in terms of the data we’ve seen. The market had been pricing in a very soft Fed, but that’s being re-priced.”
Futures prices put the likelihood the Fed will start raising borrowing costs in July 2015 at 69 percent yesterday, compared with 47 percent for June 2015, based on trading on the CME Group Inc.’s exchange.
Investors at the previous seven-year auction on March 27 submitted bids for 2.59 times the amount of debt available, down from 2.72 times in February.
The U.S. is scheduled to announce today the size of a two- year floating-rate sale set for April 29.
Orders for goods meant to last at least three years increased 2.6 percent, the biggest gain since November, after rising 2.1 percent in the prior month, a Commerce Department report showed. The median forecast of economists surveyed by Bloomberg called for a 2 percent advance.
Treasuries rose yesterday as a weaker-than-forecast housing report and the conflict between Russia and Ukraine spurred investors to seek a haven in government securities.
The Commerce Department said new home sales dropped 14.5 percent in March to a 384,000 annualized pace, lower than any forecast of economists surveyed by Bloomberg News and the weakest reading since July.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, was little changed at 2.22 percentage points. The average over the past decade is 2.21.
Fed policy makers are winding down the bond-purchase program they have used to support the economy. They have kept their target for overnight lending between banks in a range of zero to 0.25 percent since December 2008.
“The U.S. economy is healing and is getting better,” Mohamed El-Erian, who quit Pacific Investment Management Co. in January, said yesterday on Bloomberg Television’s “In the Loop” with Betty Liu. The pace of growth in the U.S., China and Europe means the Fed won’t raise rates “for a while,” he said.
El-Erian is chief economic adviser at Allianz SE, the Munich-based insurer and money manager that also owns Pimco, and a columnist for Bloomberg View.