Treasuries Post Longest Rally Since January After CPI Report

Treasuries rose for a fifth day, the longest rally in five months, after a government report showed consumer prices rose less than forecast in May, easing concern inflation will accelerate as the economy strengthens.

Longer-maturity debt, more sensitive to inflation expectations, rallied, with the yield on the 30-year bond dropping to the lowest in over two weeks. The Federal Reserve bought $7 billion of debt maturing between 2016 and 2019 today, less than its last purchase in that range. Central bank officials are considering whether to use next week’s policy statement to suppress any speculation they’re prepared to raise interest rates as soon as this year.

“It’s a good time for the market to trade better,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of 16 primary dealers that trade with the Fed. “Inflation is not a huge problem yet.”

The yield on the benchmark 10-year note fell three basis points, or 0.03 percentage point, to 3.63 percent at 11:06 a.m. in New York, according to BGCantor Market Data. The yield has fallen for five consecutive days, the longest rally since Jan. 14. The 3.125 percent security due May 2019 rose 1/4, or $2.50 per $1,000 face amount, to 95 27/32.

The 30-year bond yield touched 4.4308 percent, the lowest since June 1.

The Fed bought $7.5 billion of the securities offered at its last purchase of debt with maturities around today’s range. The average size of the five Fed purchases before today in this range is $7.6 billion.

The Treasury resumes note sales next week, with auctions over the three days starting June 23.

Borrowing Costs

The consumer price index rose 0.1 percent after being unchanged a month earlier, the Labor Department said today in Washington. Economists expected an increase of 0.3 percent, according to the median of 75 estimates in a Bloomberg News survey. In the 12 months ended in May, costs dropped 1.3 percent, the biggest decline since 1950.

Prices paid to U.S. producers rose 0.2 percent in May, less than forecast, the Labor Department said yesterday.

“The number confirms the weakness we saw at the wholesale level yesterday,” said Martin Mitchell, head of government-bond trading at the Baltimore unit of Stifel Nicolaus & Co. “The pressures have to be deflationary and not inflationary.”

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, has fallen about 35 basis points to 1.78 percentage points over the past week. The figure has averaged 2.23 percentage points for the past five years.

Rate Cuts

The less-than-anticipated rise in consumer prices will allow Fed policy makers to keep the benchmark lending rate between banks at a low level for longer. The Fed’s target rate is at a record low range of zero to 0.25 percent.

Traders expect a 48 percent chance the central bank will raise interest rates by the end of the year, based on futures on the Chicago Board of Trade. Expectations were over 60 percent a week ago. The Federal Open Market Committee meets on monetary policy June 24 and 25.

Fed officials are considering whether to use next week’s statement to suppress any speculation they’re prepared to raise interest rates as soon as this year. While policy makers have signaled they accept an increase in longer-term Treasury yields as the economy improves, some are concerned at any premature anticipation of rate rises.

Ten-year note yields have risen about 110 basis points since the Fed announced on March 18 it would seek to cap borrowing costs by purchasing as much as $300 billion in Treasuries over six months. The 10-year note touched 4 percent June 11.

Purchases, Sales

The central bank’s debt purchase today follows yesterday’s acquisition of $6.45 billion of three-year securities.

The U.S. may sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, according to primary dealer Goldman Sachs Group Inc. The Treasury sold $65 billion in coupon securities last week and will auction two-, five-and seven-year securities next week.

“There is a large feeling that we hit the highs in yield last week because of supply,” said Adam Brown, managing director and Treasury trader at primary dealer Barclays Capital Inc. in New York. “The absence of supply has allowed the market to rally back to what people think are fair levels.”

U.S. debt has handed investors a loss of 4 percent since March 31 amid the increase in supply, heading for the worst quarter since the securities lost 5.9 percent in the first three months of 1980, according to Merrill Lynch & Co.’s U.S. Treasury Master Index.

‘I Am Concerned’

President Barack Obama said yesterday that the rise in the nation’s debt burden is cause for concern. The Congressional Budget Office projects the federal budget shortfall will reach a record $1.85 trillion this year, with the gap exceeding $600 billion through the year 2019.

“I am concerned about the long-term issue of our structural deficit and our long-term debt,” Obama said in an interview with Bloomberg Television at the White House. “If we don’t get a handle on that, then there’s no doubt that, at some point, you know, whether it’s the Chinese, the Koreans, the Japanese, whoever else has been snatching up Treasuries, are going to decide that this is too much of a risk.”

Rising Treasury yields have also pushed up mortgage rates, threatening the economic recovery. Thirty-year fixed-rate mortgages jumped to 5.53 percent from as low as 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan dropped 16 percent to 514.4 in the week ended June 12, from 611 the prior week. The group’s refinancing gauge declined 23 percent, while the purchase index fell 3.5 percent.