Treasuries Decline Before U.S. GDP, Employment Reports This Week

April 28, 2014

New York (Apr 28)  Treasuries fell, snapping gains that pushed 30-year yields to a nine-month low, before reports on gross domestic product and employment this week.

Federal Reserve policy makers will probably continue to scale back the bond purchases they have used to support the economy at the end of a two-day meeting April 30, based on a Bloomberg News survey of analysts. Hedge-fund managers and other large speculators maintained bets 10-year note futures contracts will decline, based on U.S. Commodity Futures Trading Commission data last week.

“This is not a great yield to have if you believe the economy is picking up,” said Peter Osler, head of rates strategy at broker Marex Spectron Group Ltd. in London. “A view in the market is that we are in the economic uptrend and yields should head higher. But given speculative investors are generally short Treasuries, their downside might be limited in the near term.” A short position is a bet an asset’s price will decline.

Benchmark 10-year yields increased two basis points, or 0.02 percentage point, to 2.68 percent as of 6:51 a.m. in New York, based on Bloomberg Bond Trader prices, the first rise in six days. The 2.75 percent note due in February 2024 fell 5/32, or $1.88 per $1,000 face amount, to 100 19/32.

While the rate was more than a full percentage point from the record-low 1.379 percent reached in July 2012, it was still below its 10-year average of 3.45 percent.

Thirty-year bond yields rose one basis point to 3.45 percent. The rate dropped to 3.42 percent on April 25, the lowest level since July 3.

Bond Returns

The Bloomberg Global Developed Sovereign Bond Index (BGSV) has risen 1 percent in April. It is up 3.7 percent in 2014, or triple the 1.1 percent gain from the MSCI All-Country World Index of shares, which includes reinvested dividends.

U.S. economic growth expanded at a 1.2 percent annualized pace in the first quarter, the slowest in a year, based on a Bloomberg survey of economists before the Commerce Department report April 30.

Employers in the U.S. added 215,000 workers this month, the most since November, analysts project a May 2 report from the Labor Department will say.

The unemployment rate fell to 6.6 percent from 6.7 percent, according to the median forecast in a separate Bloomberg survey. That figure would match January’s as the lowest since October 2008.

Data today will show pending home sales rose in March from February and manufacturing as measured by the Dallas Fed increased in April, based on Bloomberg surveys.

Economy Recovers

The U.S. economic recovery has accelerated amid improvement in consumer spending, a housing recovery, and continued easy monetary policy, fueling speculation that a period of “a new normal,” or lasting stagnation that followed the financial crisis, is about to end.

“What you’ll see in next the few years is we’re going to head back to a new destination,” Scott Mather, one of Pacific Investment Management Co.’s six deputy chief investment officers, said in an April 25 Bloomberg Radio interview. The firm’s forecast for U.S. growth has increased to the high 2 percent level, “which is better than sub-2 percent level of growth that we’ve experienced for several years,” he said.

The term “new normal” was popularized in 2009 by Bill Gross, Pimco’s co-founder and chief investment officer, and former Chief Executive Officer Mohamed El-Erian to describe an era of lower returns, heightened government regulation, diminishing U.S. clout in the world economy and a bigger role for developing nations. The term was coined by Bloomberg News reporter Rich Miller.

Short Positions

Speculative short positions outnumbered long positions by 145,865 contracts on the Chicago Board of Trade for the week ending April 22. Investors have been betting on a decline since August, the data show.

Thirty-year bonds have rallied in April on the outlook for subdued inflation, while shorter-term notes lagged behind on speculation the Fed will raise interest rates at some point next year. Unrest in Ukraine increased demand for the relative safety of U.S. debt.

The difference between two- and 30-year yields narrowed to 2.99 percentage points on April 25, the least since June. The spread was 3.02 percentage points today.

“We’re expecting lower inflation for the next couple of years,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “That’s attractive for the longer end” of the maturity spectrum, Oh’e said.

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