Treasury 10-Year Note Yield Trades Within Narrowest Range Since November

Bloomberg.com   |  December 22 2010 11:27 EST

Treasuries were little changed, with 10-year notes trading in the narrowest range in almost six weeks, after the economy expanded and sales of existing homes increased less than analysts forecast.

U.S. government debt had pared losses earlier after the gross domestic product report also showed a measure of inflation increased at the slowest pace in more than 50 years. The Federal Reserve bought $2.07 billion of Treasuries due from February 2021 to February 2027 today as part of its strategy of extending record monetary stimulus through debt purchases.

“The Treasury market is taking somewhat of a breather going into the new year to assess where we are on the economic front,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of 18 primary dealers that trade with the central bank. “We’ve been in a very tight range from the initial up-trade from the lows. People just want the year to be over.”

Benchmark 10-year yields gained rose three basis points to 3.33 percent at 11:10 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 declined 7/32, or $2.19 per $1,000 face amount, to 94 2/32. The security traded within a 4 basis point range, the smallest since Nov. 11, when the traded was 2 basis points.

The difference between 10- and two-year yields was at 2.71 percentage points, about double the five-year average. A wider spread signals that investors are shunning longer-dated securities, which are more sensitive to the inflation outlook.

Inflation Measure

The U.S. economy expanded at a 2.6 percent annual rate in the third quarter. The revised increase in gross domestic product compares with a 2.5 percent estimate issued last month and was less than the median forecast of a 2.8 percent in a Bloomberg News survey, the Commerce Department said.

The Fed’s preferred price gauge, which is tied to consumer spending and strips out food and energy costs, rose at a 0.5 percent annual pace, the slowest since record-keeping began in 1959, today’s report showed.

“We are slightly bid from the lows in the wake of the number because it was slightly below consensus,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “One surprise was core PCE came in lower than the prior read as well as the consensus which underscores the lack of inflation.”

Today’s report also showed consumer spending rose at a 2.4 percent pace last quarter, the fastest since the first three months of 2007, while less than the 2.8 percent estimated last month. Spending added 1.67 percentage points to GDP from July through September.

‘Further Excuse’

“What is worrisome is the decline in consumer power which has traditionally been the big leader coming out of recessions” said Brian Yelvington, head of fixed-income research at Knight Libertas LLC in Greenwich. “The numbers show the market has gotten too bullish on how sticky the consumer rally will be. This combined with a weak inflation print will give the Fed further excuse to stay on hold.”

Home purchases increased 5.6 percent from the prior month to a 4.68 million annual rate, the National Association of Realtors said in Washington. Economists projected sales would rise to a 4.75 million pace, according to the median forecast in a Bloomberg News survey. The median price rose 0.4 percent from a year earlier.

“On a whole we saw weaker data, but I don’t know how much the data really matters,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas SA, one of the 18 primary dealers required to bid at Treasury auctions. “With low liquidity people are focusing on how to handle buybacks. The market isn’t going to do too much until year-end.”

Auction Schedule

The Treasury is scheduled tomorrow to announce the sizes of two-, five- and seven-year auctions for next week. Ten-year yields have increased about 40 basis points since Dec. 6, when President Barack Obama agreed to a two-year extension for tax cuts, widening the deficit and fueling bets that growth and inflation will quicken.

Treasuries have handed investors a 2 percent loss this month, according to Bank of America Merrill Lynch indexes, as the Fed implemented a plan to add $600 billion to the economy to spur inflation.

The last time U.S. sovereign debt fell more in a month was in December 2009, when it dropped 2.6 percent.

To contact the reporter on this story: Cordell Eddings in New York