Treasuries Rise Amid Flat Consumer Prices, Declining Confidence

Aug. 14 (Bloomberg) -- Treasuries rose for a second day as reports showed the cost of living in the U.S. was unchanged in July and an unexpected decline in consumer confidence suggesting weak consumer spending could damp the pace of recovery.

Ten-year notes posted the biggest weekly gain in almost eight months after the Reuters/University of Michigan preliminary index of consumer sentiment decreased to 63.2, below the 69 median forecast of economists surveyed by Bloomberg News. Compared with a year earlier, consumer prices dropped by the most since 1950.

“The relief over the inflation situation and the slippage in consumer confidence very readily justify the move upwards in the Treasury market,” said Eric Lascelles, chief economist and rates strategist at TD Securities Inc. in Toronto, a unit of Canada’s second-biggest bank. “The economic story is more consistent. The inflation data is bond-bullish.”

The yield on the 10-year note fell three basis points, or 0.03 percentage point, to 3.56 percent at 4:45 p.m. in New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 rose 1/4, or $2.50 per $1,000 face amount, to 100 1/2.

Ten-year yields declined 29 basis points this week, the most since they declined 45 basis points over the five days ended Dec. 19.

‘Slow’ Recovery

The flat reading for consumer prices matched the median forecast of economists surveyed by Bloomberg News and followed a 0.7 percent increase in June, data from the Labor Department showed today in Washington. Excluding food and energy costs, the so-called core index rose 0.1 percent, also as anticipated. in July, more than forecast, the first gain in nine months.

“Inflation will stay tame to surprise-to-the-downside for the rest of the year,” said Alex Li, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 18 primary dealers that trade with the Fed. “It’s going to be good for the 5- to 7-year sector and longer.”

Treasuries surged yesterday as a report showing an unexpected drop in retail sales suggested inflation remains restrained, helping to spur higher-than-forecast demand at a record $15 billion auction of 30-year bonds.

“The economic recovery will be slow at best, which is more bullish for bonds,” said David Ader, head of U.S. government bond strategy in Stamford, Connecticut at CRT Capital Group LLC.

$6.78 Trillion

U.S. government securities have handed investors a loss of 4.3 percent so far this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, versus a 17 percent return for stocks on the MSCI World Index. U.S. debt has declined amid record government borrowing as investors seek higher yields than those available from government debt.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.73 percentage points, the least in a week. The five-year average is 2.20 percentage points.

The Treasury sold $75 billion of 3-, 10-, and 30-year debt this week, the largest so-called quarterly refunding to date. President Barack Obama has pushed the nation’s marketable debt to an unprecedented $6.78 trillion. The U.S. budget deficit reached a record $1.27 trillion for the first 10 months of the fiscal year, the government said this week.

‘Extended Period’

The Fed has more than doubled the size of its balance sheet in the past 12 months to $2.02 trillion by purchasing Treasuries and other securities to thaw credit markets that froze last year. Policy makers decided this week to let a $300 billion program to buy long-term Treasuries expire in October, even as they pledged to keep interest rates near a record low for an “extended period.”

The 10-year note yield surged 37 basis points last week, the most since March 2003, after better-than-forecast employment, home-sales and manufacturing data.

Yields indicate other parts of the credit markets are normalizing.

The London interbank offered rate, or Libor, for three- month dollar loans fell to a record low 0.43 percent. Libor is about 18 basis points more than the upper end of the Fed’s target rate for overnight loans, narrowing from last year’s high of 3.32 percentage points in October.

TED Spread

The spread between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 0.26 percentage point, close to the least since March 2007.

The Libor-OIS spread was 24 basis points today. Former Federal Reserve Chairman Alan Greenspan said in a June 2008 interview he wouldn’t consider credit markets back to “normal” until the spread narrowed past the 25 basis-point level.

U.S. 30-year fixed mortgage rates declined to 5.38 percent yesterday from this year’s high of 5.74 percent in June. They were as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida.

To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net.