Treasury yields tumble to 2011 lows amid deadlock, slowing economic growth

Treasuries surged, driving 10- and 30-year yields to the lowest levels this year, as US lawmakers deadlocked over raising the debt limit and the economy grew more slowly than forecast.

Benchmark 10- and 30-year debt rose in July the most in almost a year, and Treasuries’ returns recouped all of their June losses. At the same time, rates climbed on bills maturing just after the August 2 debt-cap deadline. The economy added fewer-than-average jobs this month, a report next week is forecast to show.

“People have been stockpiling cash on the inability of Washington to agree on the debt ceiling,” said Dan Mulholland, a Treasury trader in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank, one of 20 primary dealers that trade Treasuries with the Federal Reserve. “We’ve gotten weak economic numbers, and the GDP forced people to come into the market.”

Yields on 10-year notes tumbled 17 basis points to 2.80 per cent yesterday in New York, from 2.96 per cent on July 22, according to Bloomberg Bond Trader prices. They touched 2.77 per cent, the lowest level since November 30. Yields dropped 38 basis points this month, the most since August. The 3.125 per cent securities due in May 2021 gained 1 13/32, or $14.06 per $1,000 face amount, to 102 25/32.

Thirty-year bond yields fell 14 basis points to 4.12 per cent and reached 4.10 per cent, the least since November 30. They slid 25 basis points on the month, also the most since August. Two-year note yields fell three basis points to 0.36 per cent.

‘GOING TO SLOW’
“The low bond yields are the result of investors believing that the economy is going to slow,” said David Coard, head of fixed-income trading in New York at Williams Capital Group, a brokerage for institutional investors. “The uncertainty is driving everything.”

US payrolls added 90,000 jobs in July, from 18,000 the previous month, according to the median forecast of economists in a Bloomberg News survey before the labour department reports the data on August 5. That compares with an average monthly increase of 126,000 from January through June.

The spread between two- and 10-year yields shrank to 2.43 percentage points yesterday, the narrowest since December 3, as the government said GDP grew at a 1.3 per cent annual rate from April through June after a 0.4 per cent first-quarter gain that was less than previously estimated. The median forecast in a Bloomberg News survey called for a 1.8 per cent increase.

‘ECONOMIC BULLS’
“This puts all the economic bulls back into the bull pen,” said George Goncalves, head of interest rate strategy at the primary dealer Nomura Holdings Inc.

Treasuries returned 1.8 per cent this month as measured by Bank of America Merrill Lynch indexes. They declined 0.3 per cent in June.

Rates on the $90 billion in six-month bills due August 4 rose yesterday to 0.3 per cent, the highest since they were issued in February, in a signal investors were concerned Congress wouldn’t raise the $14.3 billion debt ceiling by the deadline.

The treasury department met with bond dealers yesterday in New York to discuss next month’s quarterly auctions of notes and bonds and the debt ceiling.

The US would consider selling cash-management bills if there’s no deal on the debt cap before next week’s note-and-bond sale announcement, Morgan Stanley said in a client note after the session. The treasury would sell $51 billion of three- and six-month bills on August 1 as scheduled, said the firm, a primary dealer.

‘KEEP ROLLING THEM’
“They’ll delay the auctions and issue short-term cash- management bills and just keep rolling them,” said James Caron, head of US interest-rate strategy at Morgan Stanley in New York. “It’s one market where rates can’t get much lower.”

The Treasury sold $99 billion in notes in three daily auctions this week: $35 billion of two-year debt at a yield of 0.417 per cent, an equal amount of five-year securities at a yield of 1.58 per cent and $29 billion in seven year notes at a yield of 2.28 per cent.

Treasuries fluctuated this week as the standoff between President Barack Obama and House Republicans threatened America’s top credit rating. House Speaker John Boehner and Senate Majority Leader Harry Reid pushed competing proposals to lift the debt cap and reduce the budget deficit.

Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” July 14, saying there’s a 50 percent chance it would be cut within 90 days even if an agreement is reached by the deadline. S&P said it needs to see “a credible solution to the rising U.S. government debt burden.”

‘SIGNIFICANT DIFFERENCES’
“We always expected it would be contentious; maybe it’s a bit more than we had expected, but we had expected significant differences between the two parties,” Steven Hess, the senior credit officer at Moody’s Investors Service in New York, said in a telephone interview. “The smaller the actual reduction, the more likely a negative outlook.”

Rates for borrowing and lending securities in the repurchase-agreement, or repo, market increased to the highest level in five months amid the stalemate.

The average level of overnight general collateral repo rates traded through ICAP Plc was 0.21 percent at 10 a.m. yesterday in New York, when most trading takes place, the highest since Feb. 2.