Treasuries rose for a second day, with 10-year yields headed for the biggest weekly drop since September, as $85 billion of spending cuts that threatened to slow the world’s largest economy were set to be triggered.
Ten-year notes extended gains from February as Chinese manufacturing growth slowed, the euro-area inflation rate dropped, and Italian bonds declined, boosting demand for the relative safety of U.S. debt. While U.S. consumer spending rose, incomes dropped by the most in 20 years, a report showed.
“No one knows how much time we have in terms of the resolution of this,” Sean Murphy, a trader at Societe Generale in New York, one of the 21 primary dealers that trade with the Federal Reserve, said of the U.S. spending cuts. “We have the potential to grind higher in prices with these concerns. There may be another 10 basis points of steam left.”
The 10-year yield fell two basis points, or 0.02 percentage point, to 1.85 percent at 9:16 a.m. New York time, leaving it 11 basis points lower this week, the biggest drop since Sept. 28, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 gained 6/32, or $1.88 per $1,000 face amount, to 101 10/32. Thirty-year bond yields slid three basis points to 3.06 percent.
Ten-year yields will be at 1.85 percent on March 31 before rising to 2.30 percent by year-end, based on a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.
Treasuries trimmed gains after Commerce Department data showed household purchases, which account for about 70 percent of the U.S. economy, rose 0.2 percent in January following a 0.1 percent gain the prior month. The median estimate in a Bloomberg survey of 76 economists called for a 0.2 percent advance. Incomes slumped 3.6 percent.
U.S. government securities rallied this week after an inconclusive Italian election and as Federal Reserve Chairman Ben S. Bernanke backed the central bank’s bond purchases.
The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.74 percent today, the most costly level since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Treasury market volatility, as measured by the Bank of America Merrill Lynch MOVE index, declined yesterday to 55.9, the lowest since Jan. 24.