Treasuries fell, with two-year note yields rising from a 17-month low, as Federal Reserve Bank of St. Louis President James Bullard said the central bank should consider delaying the end of its bond-buying monetary stimulus to halt a decline in inflation expectations.
U.S. debt yields increased after the largest one-day decline since 2009 yesterday on speculation the central bank would delay interest-rate increases. Reports today showed manufacturing strength and fewer jobless insurance claims than forecast. Treasuries rose earlier, along with bonds in Germany and Japan, on signs global growth is losing momentum.
“Bullard was once at the forefront of the calls for tighter policy, and the fact that he is now capitulating some in favor of the possibility of looser policy is quite notable,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “He was a perceived hawkish FOMC member, and now he is focusing on low inflation. It suggests team hawk is maybe not just about tighter policy, but is focusing on the inflation risks.”
The yield on the two-year note (CBOT:ZTZ13) rose four basis points, or 0.04 percentage point, to 0.35% at 1:23 p.m. New York time, Bloomberg Bond Trader prices show. The 0.5% securities maturing in September 2016 lost 2/32, or 63 cents per $1,000 face amount, to 100 9/32. The yield touched 0.24% yesterday, the lowest since May 2013.
The 10-year yield (CBOT:ZNZ14) added three basis points to 2.17%. It dropped as much as 34 basis points yesterday to reach 1.86%, the lowest level since May 2013. An average of bond yields on the Bank of America Merrill Lynch Global Broad Market Index dropped to 1.51% yesterday, the least since records began in 1996.
The longest Treasuries rally in two years had pushed 10- year notes to the most overbought level in more than a decade, trading patterns show. The 14-day relative strength index reached 18, the lowest since December 2000 and below the 30 level that signals to some traders the yield has fallen too far, too fast, and may be due to reverse course.
“The market is overbought here,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “We’ve got economic data today that doesn’t feed into the notion of coming weakness in economic growth.”
Treasury trading volume at ICAP Plc, the largest interdealer broker of U.S. government debt, more than doubled to a record $945.9 billion yesterday. The amount has averaged about $322 billion a day during the past year.
“Inflation expectations are declining in the U.S.,” Bullard said in interview with Bloomberg News. “That’s an important consideration for a central bank. And for that reason I think that a logical policy response at this juncture may be to delay the end of the quantitative easing.”
The 10-year break-even rate, derived from the difference between yields on Treasuries and inflation-linked debt of similar maturities, shrank to 1.86 percentage points yesterday, the least since June 2013.
“Bullard surprised many,” said Adrian Miller, director of fixed-income strategies at GMP Securities LLC in New York. “Prior to the meltdown in the market, he’d been calling for a sooner than later rate hike with no comments about QE.”
Futures show traders betting that the Fed will raise interest rates in December 2015, with chances of an increase in September fading to 39%. The central bank has held its short-term interest-rate target at zero to 0.25% since December 2008.
The Fed has expanded its balance sheet assets to $4.5 trillion from less than $1 trillion in 2008 in an effort to stimulate growth after the global financial crisis.
Treasuries declined as a report showed applications for unemployment benefits unexpectedly dropped last week to their lowest level in 14 years. Jobless claims decreased by 23,000 to 264,000 in the week ended Oct. 11, the fewest since April 2000 and lower than any projection in the Bloomberg survey of economists.
Industrial production in the U.S. rose in September by the most since November 2012, driven by a surge at utilities and a rebound in manufacturing. The 1% advance exceeded the highest forecast in a Bloomberg survey and followed a 0.2% drop the prior month.
U.S. debt rallied earlier as Japan’s 10-year yield dropped as low as 0.47%, the least since April 2013. Its German equivalent fell to a record 0.715%.
Spain’s 10-year yield climbed 19 basis points to 2.31%, the biggest daily increase since June 24, 2013. Ireland’s 10-year yield increased 22 basis points to 1.92% and the rate on equivalent Portuguese bonds jumped 43 basis points to 3.71%.
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