Are Yields Signaling Slowdown?

Slide in U.S. Treasury yields since January counters rosier economic data.

The $10 trillion market for U.S. Treasuries is signaling that the economic recovery may be poised to weaken even as consumer confidence rises toward pre-recession levels.

Yields on 10-year Treasury notes, the benchmark for everything from mortgage rates to corporate bonds, fell as low as 1.89 percent yesterday, down from this year’s high of 2.09 percent on Jan. 23, according to data compiled by Bloomberg. The yield averaged 2.76 percent in 2011 and 3.19 percent in 2010.

The jobless rate has fallen to the lowest since February 2009, and the Conference Board said its gauge of consumer sentiment is the highest level in a year. Bond investors are focused on Europe’s sovereign-debt crisis, oil prices that exceed $100 a barrel again and home prices that have dropped to the lowest level since 2003.

“You have an economy that’s not yet firing on all cylinders,” Ira Jersey, an interest-rate strategist in New York at Credit Suisse Group AG, one of primary dealers that are required to bid at Treasury auctions, said yesterday in a telephone interview. “The market is telling you that the economy’s not strong enough to generate an inflationary spiral.”

The Federal Reserve lowered in January its projected range for growth this year to 2.2 percent to 2.7 percent, from 2.5 percent to 2.9 percent in November. The range for next year is 2.8 percent to 3.2 percent, down from a previous forecast of 3 percent to 3.5 percent. The median estimate of economists surveyed by Bloomberg News is for growth of 2.4 percent, down from 2.5 percent in a January survey.

While those rates of expansion would still be up from the 1.7 percent recorded in 2011, they’re below the average of 3.1 percent in 2004 through 2006, before the start of the biggest financial crisis since the Great Depression.

Strategists are lowering their yield forecasts. The median end-of-2012 estimate for 10-year Treasury yields has fallen to 2.45 percent from 2.72 percent in November, according to a survey of more than 70 economists and strategists surveyed by Bloomberg. Credit Suisse sees them at 2.25 percent.

“If you take the capital spending piece out of the U.S. economy equation, you’re left with a consumer muddling along with modest growth,” Rob Robis, head of fixed-income macro strategies in Atlanta at ING Investment Management, which manages about $160 billion, said yesterday in a telephone interview. Falling capital expenditures “is very worrisome if this translates to a broader trend,” he said.


Orders Tumble

Orders for durable goods fell in January by the most in three years. Bookings for goods meant to last at least three years slumped 4 percent, after a revised 3.2 percent gain the prior month, data from the Commerce Department showed yesterday in Washington. Economists projected a 1 percent decline, according to the median forecast in a Bloomberg News survey.

The yield on the benchmark 10-year note rose two basis points yesterday, or 0.02 percentage point, to 1.95 percent in New York, according to Bloomberg Bond Trader prices. The price of the 2 percent security due in February 2022 fell 5/32, or $1.56 per $1,000 face amount, to 100 1/2. Ten-year notes yielded 1.94 percent today as of 7:17 a.m. in New York.

Even as confidence among U.S. consumers as measured by the New York-based Conference Board’s index climbed more than forecast to a 12-month high in February, the S&P/Case-Shiller index of property values in 20 cities fell 4 percent from a year earlier, reports showed yesterday.

Gross domestic product also faces potential headwinds from higher taxes if the George W. Bush cuts are allowed to expire, as well as spending reductions that were triggered as part of the government’s deal to raise the debt limit last year, said Ajay Rajadhyaksha, an analyst and managing director at Barclays Plc in New York. The reduction in fiscal stimulus may lop as much as 5 percentage points from GDP growth, he said.

“By the end of this year we have a lot of potential fiscal tightening,” Rajadhyaksha said in a Feb. 27 telephone interview. “Congress will probably find its way out of some of these automatic cuts that are coming, but it might not find its way out of all of them.”

Tame inflation and demand for the safest assets amid Europe’s sovereign-debt crisis helped propel returns on Treasuries to 10 percent, including reinvested interest, in the 12 months ended Jan. 31. Last year’s gain of 9.8 percent, as measured by Bank of America Merrill Lynch indexes, beat the 2.1 percent rise in the Standard & Poor’s 500, including dividends.


Forward Rates

Traders are betting that government debt yields will remain subdued. The cost to exchange fixed-for floating-rate payments in a decade has averaged 3.41 percent this year. The so-called forward 10-year swap rate, which has fallen from last year’s peak of 5.47 percent in February, is trading at the same levels as early 2009 during the depths of the financial crisis.

Europe’s debt crisis, geopolitical risk in the Middle East and the potential for more Fed easing are other reasons why Treasury yields have failed to rise, said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut.

That combination “freezes positions” Ader said in a Feb. 27 telephone interview.

The World Bank reduced its global growth forecast for this year to 2.5 percent, from a June estimate of 3.6 percent, the Washington-based institution said Jan. 18. It warned that the crisis in Europe and slower growth in developing economies may crimp the global economy further.

After its Jan. 24-25 meeting, the Federal Open Market Committee said subdued inflation and slack in the economy are likely to warrant keeping the target rate in a range of zero to 0.25 percent until at least through late 2014, extending a previous date of mid-2013 or later. Policy makers also set an explicit inflation goal of 2 percent for the first time.

After buying $2.3 trillion of Treasury and mortgage-related bonds from 2008 to June 2011 to stimulate the economy, Fed Chairman Ben S. Bernanke said after the January meeting that policy makers are considering another set of purchases. Bernanke is scheduled to appear today before the House Financial Services Committee for semi-annual testimony to explain the Fed’s monetary policy and the outlook for the economy.

Rather than adding to inflation, traders see oil prices hovering at about $100 a barrel, almost 60 percent above the average price of $64 for the past decade, as being a drag on the economy. An extended $10 rise in oil cuts 0.5 percentage point off U.S. growth over two years, according to Deutsche Bank AG.


‘Drain’ on Incomes

“That’s a drain on household incomes,” said Robis of ING. “You see higher oil prices, and it could have an impact on consumer and business confidence.”

Inflation has stayed contained in part because wage growth is stunted even as unemployment recedes. Average hourly earnings rose 1.9 percent in January from a year earlier, the smallest increase since April, and down from 3.2 percent in 2008 and 3.7 percent in January 2009, the Labor Department said Feb. 3. The jobless rate fell to 8.3 percent in January, the lowest level in three years, compared with a high of 10 percent in October 2009.

Inflation as measured by the personal consumption expenditures index, excluding food and fuel, the measure used by the Fed for its forecasts, rose 1.8 percent in December from a year earlier. That’s down from 2.5 percent as recently as 2008.

“There’s enough out there to be encouraged, but not an awful lot to get excited about with the U.S. economy,” David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc. in Valley Forge, Pennsylvania, said yesterday in a telephone interview. “Long story short, there’s not a lot to go out and push rates higher at this point.”


Bloomberg News


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