Bad news is good for bonds

Treasuries are delivering the biggest weekly gains in more than a month amid an uneven U.S. economic expansion, suggesting the Federal Reserve won’t accelerate the pace of projected interest-rate increases.

Ten-year notes headed for a second quarterly gain after the Fed cut its long-term forecasts for economic growth and its target interest rate earlier this month. Citigroup Inc. (NYSE:C), one of the 22 primary dealers that trade with the central bank, cut its year-end forecast for the 10-year note yield by 40 basis points after data this week showed gross domestic product shrank more than analysts predicted.

“It’s the weak data,” said Shyam Rajan, an interest-rate strategist at Bank of America Merrill Lynch in New York, a primary dealer. “We’re now looking at full year growth of less than 2 percent.” The firm expects second-quarter growth of 3.2 percent, down from 4 percent, he said.

The 10-year yield two one basis points, or 0.02 percentage point, to 2.51 percent at 10:06 a.m. New York time, according to Bloomberg Bond Trader data, down from 2.72 percent on March 31. The 2.5 percent note due May 2024 gained 5/32, or $1/56 per $1,000 face amount, to 99 28/32. The yield on the 10-year note dropped nine basis points this week, the most since the week ending May 16.

The Citigroup Economic Surprise Index, which measures whether U.S. data are above or below market expectations, slid to minus 23.1 yesterday, the least since May 1, boosting demand for bonds.

Bond returns

Treasuries returned 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities gained 4.8 percent, while Japan’s earned 1.5 percent.

Citigroup reduced its year-end forecast for the 10-year note yield to 2.95 percent, from 3.35 percent.

“The data have been very disappointing -- 2014 should have been a breakout year for growth with consensus estimates close to 3 percent for the year,” strategists Amitabh Arora and Kevin Shapiro wrote in a report today.

The firm also cut year-end estimates for the 30-year bond yield to 3.45 percent, from 3.85 percent, and the yield on the five year note to 2.25 percent from 2.45 percent.

Fed officials at a June 17-18 meeting cut their long-run estimate for the target interest rate to 3.75 percent from 4 percent and lowered their prediction for long-term economic growth to a range of 2.1 percent to 2.3 percent, versus 2.2 percent to 2.3 percent forecast in March.

Fed Chair Janet Yellen last week affirmed policy makers’ plan to hold the benchmark rate near zero for a “considerable time.”

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