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Treasury Two-Year Yields Drop to Record Low as Economy Weakens
By Cordell Eddings and Susanne Walker
July 17 (Bloomberg) -- Treasury two-year note yields fell to a record low as reports showed that consumer confidence plunged to the lowest level in a year and retail sales declined, heightening concern the economic recovery is stalling.
Yields on 10-year notes traded near a 14-month low this week after minutes of the Federal Reserve’s June meeting showed policy makers noted that risks to the recovery increased. Housing starts and sales of existing homes declined last month, reports next week are forecast to show.
“The economic data just keeps coming in softer,” said James Combias, New York-based head of Treasury trading at Mizuho Financial Group Inc., one of the 18 primary dealers that trade with the central bank. “The bond market is pricing in the real possibility of slower growth.”
The benchmark 10-year note yield fell 14 basis points, or 0.14 percentage point, to 2.92 percent yesterday in New York, from 3.06 percent on July 9, according to BGCantor Market Data. It touched 2.88 percent on July 1, the lowest level since April 2009. The price of the 3.5 percent security due in May 2020 rose 1 5/32, or $11.56 per $1,000 face amount, to 104 29/32.
The two-year note yield dropped for the seventh straight week, falling 4 basis points to 0.59 percent and touching its lowest level ever, 0.5765 percent.
‘Diet of Bad News’
Ten-year yields touched 4.01 percent on April 1, the highest level since October 2008.
“We’ve moved a long way in a short period of time,” said Tom Roth, senior Treasury trader in New York at Mitsubishi UFJ Financial Group Inc. “To maintain these low levels, we need a diet of bad news. Some days we get it.”
The Thomson Reuters/University of Michigan preliminary index of consumer sentiment tumbled to 66.5 this month, from 76 in June, data showed yesterday. The forecast in a Bloomberg News survey was for a decline to 74. U.S. retail sales fell in June more than forecast, 0.5 percent, after a revised 1.1 percent drop in May, a Commerce Department report said on July 14.
The consumer price index slipped 0.1 percent in June, the third straight monthly decrease, a Labor Department report showed yesterday. The 0.9 percent year-over-year gain in core consumer prices, which excludes food and energy, matched the smallest since 1966, it showed.
“Inflation is very low and consistent with the idea that the Fed is continuing to shift their broader concerns to a potential disinflationary environment,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It’s all part and parcel of the same underlying theme of a low-inflation story, which suggests the Fed leaves the zero interest-rate policy in place for longer.”
‘Risk of Deflation’
Central bank policy makers at last month’s meeting lowered their outlook for inflation this year to a range of 1 percent to 1.1 percent, from 1.2 percent to 1.5 percent in April. They cut an estimate for 2010 growth to a range of 3 percent to 3.5 percent, from 3.2 percent to 3.7 percent in April. A few officials expressed concern at about “some risk of deflation,” according to minutes released July 14.
The Fed has kept its benchmark interest rate in a range of zero to 0.25 percent since December 2008. Futures on the CME Group Inc. exchange yesterday showed a 13 percent chance it will raise the target rate for overnight bank loans by at least a quarter-percentage point by December, compared with a 27 percent likelihood a month ago.
“The Fed is on record talking about deflation, which they haven’t in some time,” said Thomas Tucci, head of U.S. government bond trading in New York at primary dealer Royal Bank of Canada. “When the Fed starts to identify things by name, that means it is seriously on their minds.”
Stocks Tumble
Stocks dropped, with the Standard & Poor’s 500 Index falling 1.2 percent.
Housing starts slipped to 2.2 percent in June from a month earlier, economists in a Bloomberg survey forecast before a Commerce Department report on July 20. The National Association of Realtors will say on July 22 that sales of existing homes last month fell 9.9 percent, according to another survey.
Global demand for long-term U.S. financial assets slowed in May from a month earlier as investors abroad sold stocks and accumulated Treasuries at the weakest pace in a year.
Net buying of long-term equities, notes and bonds totaled $35.4 billion for the month, compared with net purchases of $81.5 billion in April, the Treasury Department reported yesterday. Total net foreign purchases of Treasury notes and bonds were $15 billion in May, the weakest level since May 2009 and down from $76.4 billion in April.
The U.S. sold $69 billion of notes and bonds this week: $35 billion in three-year securities, $21 billion in 10-year debt and $13 billion in 30-year bonds.
To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net
Last Updated: July 17, 2010 00:00 EDT
