NEW YORK: US government debt prices rose on Monday on news of weaker-than-expected home resales in March and the implications of waning inflation.
Slower inflation causes real interest rates to rise and leaves the door open for the Federal Reserve to continue its large-scale purchases of bonds and even to increase them.
Federal Reserve Bank of New York President William Dudley told a conference on transatlantic economic interdependence on Monday that the US central bank's stimulative asset-purchase program has been "as high or higher than" he originally expected and the costs have been "the same or lower."
Last week, the government reported that US consumer prices fell in March for the first time in four months. In the 12 months through March, consumer prices rose just 1.5 percent.
"Lower yields reflect a smaller inflation-risk premium," said Zach Pandl, strategist at Columbia Management.
Low inflation, combined with other data indicating that economic growth faltered at the end of the first quarter, make the Fed less likely to pedal back on its monetary accommodation tactic of buying large amounts of Treasuries in the open market, a prospect hotly debated earlier this year when economic data began to look more promising.
The recent data - including a 0.6 percent drop in home re-sales in March, reported Monday - and the prospect for more economic weakness partly due to fiscal restraint, have muted that debate, boosting bond prices and leaving yields near four-month lows.
"Recently, it's been (reduced) inflation concerns that have been much the bigger driver of the Treasury market," Pandl said.
On the open market, benchmark 10-year Treasury notes were 4/32 higher at 102-23/32 on below-average volume, yielding 1.699 percent.
The gains occurred even though the market must absorb new supply this week. The Treasury will auction $35 billion in two-year notes on Tuesday; $35 billion in five-year debt on Wednesday and $29 billion in seven-year notes on Thursday.
Treasury debt prices earlier weakened slightly after the re-election of Italian President Giorgio Napolitano encouraged the view that a new government would be formed that could work to solve the fiscal woes that have undermined investors' confidence in the region.
The early selling in Treasuries was short-lived as the drop in prices drew bids from bargain-minded investors in New York trading. The buying tapered off as the 10-year yield encountered technical resistance in the 1.67 percent area, analysts said.
"We already had a tremendous move in rates in the last few weeks," said Robbert Van Batenburg, director of market strategy at Newedge USA LLC in New York. "We will probably grind to new lows for the year, but it will take some time."
Bond prices also got some support from the Fed's regular purchase of debt in its effort to support the economic recovery that has remained weaker than expected.
The US central bank bought $3.728 billion in Treasuries that mature in January 2019 to March 2020.
Treasury Inflation-Protected Securities improved for a second straight session after last week's dramatic sell-off on speculation of growing disinflation risk as the economy showed signs of faltering.
The spread between 10-year TIPS yields and regular 10-year Treasury yields expanded to 2.34 percentage points after falling to 2.28 points on Thursday, which was its tightest level since August.
The spread between "real" yields on TIPS and yields on nominal Treasuries gauges investors' inflation expectations, which the Fed monitors closely.
Wall Street stocks were on track to end higher. The Standard & Poor's 500 index was up 0.47 percent at Monday's closing bell.
On the economic data calendar for Tuesday are US new home sales figures for March.
<Center><b><i>Copyright Reuters, 2013</b></i><br></center>
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