Treasury 10-year yields fell from the highest level in nine months after a government report showed the U.S. economy unexpectedly contracted in the fourth quarter.
The benchmark yield touched the highest level since April earlier before Federal Reserve policymakers end a two-day meeting Wednesday. Gross domestic product was restrained by the biggest plunge in defense spending in four decades and dwindling inventories as household purchases picked up, the Commerce Department said.
The Treasury on Wednesday auctions $29 billion of debt due in January 2020, the last of $99 billion of note sales this week.
The GDP report was “certainly a catalyst for some buying,” said Christopher Sullivan, who oversees $2.1 billion as chief investment officer at United Nations Federal Credit Union, New York. “This does shatter the preconception of underlying momentum” in the economy.
The 10-year yield was little changed at 2% at 9:08 a.m. EST after touching 2.03%, the highest since April 25, according to Bloomberg Bond Trader data. The price of the 1.625% notes due in November 2022 was 96 20/32.
GDP dropped at a 0.1% annual rate, weaker than any economist forecast in a Bloomberg survey and the worst performance since the second quarter of 2009, when the world’s largest economy was still in the recession, Commerce Department figures showed Wednesday. A decline in government outlays and smaller gain in stockpiles subtracted a combined 2.6% points from growth.
“It’s a surprise — it’s weaker than expected, and there are aspects to it that need to be looked at,” said David Ader, head of U.S. government-bond strategy at CRT Capital Group. “It’s positive for the Treasury market, relative to where we are, and there are lots of caveats.”
Treasuries fell earlier as the U.S. added 192,000 workers in January, data from the ADP Research Institute showed Wednesday. The median forecast of 38 economists surveyed by Bloomberg called for an advance of 165,000. Estimates ranged from gains of 120,000 to 235,000.
The 10-year term premium rose to -0.58%, the highest level since April 5, according to data compiled by Bloomberg. The measure dropped to a record -1.02% in July.
A negative reading indicates investors are willing to accept yields below what’s considered fair value.
Policymakers said they might end their $85 billion monthly bond purchases in 2013, with members divided between a mid- or end-of-year finish, according to the record of the Federal Open Market Committee’s Dec. 11-12 gathering.
Investor speculation that the Fed will end its third round of quantitative easing in 2013 is overdone, Bank of America Merrill Lynch economist Michael Hanson and strategist Priya Misra wrote in a research note Tuesday. The statement from the FOMC is likely to keep the central bank’s current policy stance in place, they said.
“Yields may rise a little bit higher while the risk-on trade continues,” said Kazuaki Oh’e, a bond salesman in Tokyo at CIBC World Markets Japan, a unit of Canada’s fifth-largest lender. “I don’t expect any large sell-offs in Treasuries, given that the Fed meeting will confirm it will continue its bond-purchase program.”
The seven-year notes scheduled for sale Wednesday yielded 1.41% in pre-auction trading, up from 1.23% at the previous sale of similar-maturity securities on Dec. 19. That compares with a record-low auction yield of 0.954% on July 26.
The U.S. sold $35 billion of five-year notes Tuesday at the highest yield since March. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of notes offered, was 2.88 at auction, vs. 2.72 last month.
