US Treasuries yields dropped on Thursday as traders eyeing a possible slowing of American economic growth drove up prices for a fourth straight day. Yields of 10- and 30-year Treasuries touched three-week lows as investors, already surprised on Wednesday by data showing the US economy contracted more than previously thought in the first quarter, reacted to data showing short-of-forecast increases in US consumer spending.
"People are assessing where they think their second- and third-quarter, fourth-quarter, GDP estimates are going to be. said Wilmer Stith, co-manager in Baltimore of the Wilmington Broad Market Bond Fund. "Even for those that are optimistic, it's like getting that 'F' in college in that first test; it's harder to raise that average up." The Commerce Department said May spending increased 0.2 percent. Spending, which accounts for more than two-thirds of US economic activity, had been forecast to rise 0.4 percent after a 0.1 percent dip in April.
"Just at face value, the small increase in May suggests that spending is not going to be as healthy as people are hoping for," said Kim Rupert, managing director of global fixed income at Action Economics in San Francisco. "If the economy doesn't bounce back smartly from the 2.9 percent decline in Q1, then it looks like the Fed may be lower for longer still."
Sharon Stark, chief fixed income strategist at D.A. Davidson, said bond trading was also affected by a Labor Department report showing new applications for state unemployment benefits slipped 2,000 to a seasonally adjusted 312,000 for the week ended June 21. The declining claims suggest a recent streak of payroll job gains above 200,000 is likely to be sustained, lending the economy enough momentum for inflation to start perking up. Yields on 30-year Treasuries fell as low as 3.335 percent, a level last touched on June 2. The bonds last traded to yield 3.3508 percent, up 19/32 in price.
Benchmark 10-year notes were up 10/32 to yield 2.5232 percent after hitting a low of 2.516 percent, also a level last seen June 2. End-of-quarter buying by some money managers dressing up balance sheets for financial reports was also weighing on yields, according to Stith, and may for the moment be compensating for softer demand by banks. Banks, which have stepped up Treasuries purchases in recent months, were thin on the ground on Thursday at a Treasury Department auction of $29 billion of new seven-year notes, Stith said.
Thursday's auction, which followed a $35 billion auction of five-year notes on Wednesday, came with a high yield of 2.152 percent. "The last time we had a five-year and seven-year we felt big bank demand. Really not so much this time around, and it will be interesting to see whether we hold on to new gains as we have now," Stith said.