U.S. 30-Year Bond Rises on Speculation Data to Show Economy Is Slowing

U.S. 30-year bonds rose, sending yields toward the lowest level since 2009, before government reports this week forecast to show companies reduced orders for equipment and the economy grew slower than earlier reported.

The longest maturities, those most sensitive to inflation, gained as the U.S. economy showed signs of faltering. Treasuries due in 10 years and less fell on speculation yields that dropped to record lows this month will deter investors when the government sells $99 billion of notes starting tomorrow. The extra yield investors demand to purchase 30-year bonds instead of two-year notes narrowed to as low as 3.17 percentage points, the least since September.

“The financial markets are whipping themselves up for a fear of a double-dip” recession, said Roger Bridges, who oversees the equivalent of $15.6 billion of debt as the Sydney- based head of bonds at Tyndall Investment Management Ltd., a unit of Japan’s Nikko Asset Management Co. “Treasuries are very expensive. So long as this fear keeps on going, they will continue” to be so.

Thirty-year yields declined one basis point to 3.38 percent at 12:21 p.m. in Tokyo, according to Bloomberg Bond Trader prices. The 3.75 percent security due in August 2041 rose 1/4, or $2.50 per $1,000 face amount, to 107. The yield fell to 3.34 percent on Aug. 18, the least since January 2009.

Ten-year rates advanced two basis points, or 0.02 percentage point, to 2.08 percent. The record low was 1.97 percent set Aug. 18.

Inflation Expectations

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.01 percentage points. The spread was 1.96 percentage points on Aug. 18, the least since October. The five-year average is 2.06 percentage points.
Japan’s 10-year yield was little changed at 0.985 percent, versus this year’s low of 0.97 percent set on Aug. 19.

U.S. bookings for durable goods excluding transportation fell 0.5 percent in July after rising 0.4 percent in June, according to the median forecast of economists surveyed by Bloomberg News. The data is due for release on Aug. 24.

A report on Aug. 26 may show gross domestic product grew at a 1.1 percent annual pace in the April-to-June quarter, down from 1.3 percent estimated last month, a separate survey shows. New home sales were probably unchanged in July from June, figures may show tomorrow.

Record-low yields on U.S. Treasuries show traders expect Federal Reserve Chairman Ben S. Bernanke will signal as soon as this week that the central bank will begin a third round of so- called quantitative easing to boost the economy, a scenario the world’s biggest bond dealers said is unlikely.

Pricing in QE3

Barclays Plc said 10-year yields indicate traders have priced in $500 billion to $600 billion of Treasury purchases by the Fed. Citigroup Inc. said current rates can only be justified by more central bank bond buying or assuming the economy will shrink by 2 percent.

“The market is pricing in another round of large-scale asset purchases, looking for confirmation possibly as early as the Jackson Hole symposium” in Wyoming this week, Anshul Pradhan, a fixed-income research analyst at Barclays in New York, said in an interview last week. “The probability of that is low. If the Chairman does disappoint, then there should be a reversal in the outperformance of 10-year notes.”

Central bankers from around the world will meet in Jackson Hole at an annual conference sponsored by the Fed Bank of Kansas City. Bernanke triggered financial rallies a year ago when he said at the same gathering that the Fed was prepared to “do all that it can” to ensure economic recovery and suggested it would purchase more securities if growth slowed.

Bond Auctions

The government is scheduled to auction $35 billion of two- year notes tomorrow, the same amount of five-year debt on Aug. 24 and $29 billion of seven-year debt on Aug. 25. Two-year yields were little changed at 0.20 percent, versus the record of 0.16 percent set Aug. 9.

“Treasury yields will rise,” said Zeal Yin, who invests in U.S. government debt for Taipei-based Shin Kong Life Insurance Co., Taiwan’s second-largest life insurer with the equivalent of $41.4 billion in assets. “The recovery will be slow” though the U.S. will avoid a recession, he said.

Shin Kong Life sold Treasuries last week, Yin said.

Bank of America Merrill Lynch, one of the 20 primary dealers authorized to trade directly with the Fed, recommended 10-year notes as a strategy to contend with a possible U.S. recession.

“A core long in 10-year Treasuries may be the best medium- term strategy as events continue to unfold,” bank strategists Ralph Axel, Bin Gao and Adarsh Sinha wrote to clients on Aug. 19. An investor who owns bonds has a so-called long position.(Bloomberg)