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US Bond Yields at Close to November Low Amid Slow Inflation

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US 30-year bonds climbed, pushing yields close to the lowest seen this month while at the same time, it was shown that US inflation was holding under the 2% goal set by the Federal Reserve. As a result, policy makers have additional time whether or not to increase interest rates in 2015.

As far as US government securities, these pared gains after data revealed existing home sales and leading economic indicators increased more than October’s forecast. In all, $13 billion of inflation linked notes to stronger than average demand was sold in the US. Earlier, Treasurers rose following reports that indicated a weakening manufacturing sector in both Asia and Europe.

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In a statement from Thomas Simons, government debt economist with New York-based Jefferies LLC and one of the 22 primary dealers who deals with the Federal Reserve, expectations for inflation are still relatively low so it is difficult to see them making a turn-around within the near future.

According to data from the Bloomberg Bond Trader, there was also a decrease of 30-year bond yields by three basis points or 0.03% point to 3.05% by mid-afternoon. On the long board, yield, being the security that is most sensitive to inflation, hit 3.02% after it touched 3.01% on November 17, the lowest reported since October 30.  The price of the 3% security that will mature in November 2044 reached 98 31/32 after jumping 15/32 or $4.69 per $1,000 face amount.

For 10-year note yields, these dropped three basis points to 2.33% after falling to a low 2.30%.

The yield gap between 10-year Treasuries and comparable Treasury Inflation Protected Securities, which help gauge trader expectations for consumer prices over a debt’s lifetime known as the break-even rate, narrowed at minimum to an intraday basis since June of last year. Prior to widening to 1.86% points, the difference hit 1.83% points.

At a yield of 0.497%, the US sold 10-year Treasury Inflation Protected Securities, this compared to a 0.504% forecast in Bloomberg News survey that covered six of the 22 primary dealers. Five primary dealers rated the auction a four on a scale of 1 to 5, with on equaling failure.

The bid-to-cover ratio, used to gauge demand by making comparisons of total bids with the actual amount offered, was at 2.57 opposed to the 2.20 seen at the last securities’ auction in September, being the lowest since 2008. For the past 10 sales, the average was 2.51.

Indirect bidders, an investor category to include foreign central banks, purchased 62.45 of the securities, the greatest amount since this past May versus a 53.7% average for the past 10 offerings. Direct bidders consist of non-primary dealer investors who place bids with the Treasury directly, bought 8.1% compared to the 8.7% average for the past 10 sales.

Inflation indexed notes pay interest but at lower rates than nominal Treasuries based on a principal amount linked to the index for the Labor Department’s consumer price.

In an announcement from the Treasury, in addition to selling $13 in two-year floating rate notes, $92 bill in fixed rate notes will be auctioned off this week, broken down by $28 billion in two-year debt, $35 billion in five-year securities, and another $29 billion in seven years.

The consumer price index climbed in the past 12 months ended in October 1.7%, just as it did the month prior. In a Bloomberg survey, economists projected 1.6%. On a monthly basis, the index remained unchanged, after rising in September 0.1%. The forecast by economist was a 0.1% drop.

Yesterday, minutes from the Fed’s October meeting were released in which a number of officials stressed vigilance for evidence of a potential downward shift pertaining to longer-term expectations for inflation.

The benchmark interest rate target in a range of 0% and 0.25% since December 2008 was kept by the Fed in an effort to support the economy. The bond purchase stimulus program was concluded at October’s meeting, citing labor market improvements.

Last month, policy makers reiterated that interest rates will be kept close to 0% for a considerable period of time after bond purchases ended. However, the actual timing will depend on progress made toward two goals of 2% inflation and maximum employment.

After data showed purchases of prior owned US homes took an unexpected rise in October to a one-year high, Treasuries pared gains. Last month, a gauge of US leading indicators widened while there was a jump this month for a Fed factory index specific to the Philadelphia region.

Ira Jersey, interest rate strategist at the primary dealer Credit Suisse Group AG in New York said that the US appears to be the island of prosperity that everyone is talking about but he added that people are not as optimistic after looking at data coming out of China and Europe.

As indicated by Markit Economics in London, 30-year bond yields hit a three-day high, this after a gauge of services and factories activity in the euro area dropped to 51.4 unexpectedly in November, the lowest in 16 months and a change from October at 52.1. Any reading above 50 suggests expansion.

For China, a factory PMI fell to 50.0 this month, a change from October’s 50.4. HSBC Holdings Plc. Along with Markit said today that this was below the median estimate from a Bloomberg survey of 50.2.

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David Goldstein

David is cool! :)

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