Trusted performance.  Lasting value.

By Susanne Walker – May 15, 2013

Treasury 10-year note yields fell the most in a month as an unexpected drop in regional manufacturing and declining producer prices eased speculation that a strengthening economy will prompt the Federal Reserve to reduce stimulus.

The benchmark yields fell from a two-month high as industrial production in April declined the most in eight months. U.S. debt rose after data showed the euro-area economy shrank more than analysts forecast and German growth cooled. U.S. 10-year notes had declined for four consecutive days on speculation stronger economic data would lead the central bank to curtail bond-buying.

“Treasuries have rallied and equities come off the highs as data reminds the market that the path to a recovery will be a choppy one,” said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “It brings into question the idea we would see 2 percent 10-year yields this week.”

U.S. 10-year yields fell four basis points, or 0.04 percentage point, to 1.94 percent at 10:50 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent security due in May 2023 added 11/32, or $3.44 per $1,000 face amount, to 98 10/32. Earlier, yields climbed to 1.98 percent, the most since March 15.

Thirty-year bond yields were three basis points lower at 3.16 percent, declining from a seven-week high reached yesterday. The Standard & Poor’s 500 Index of stocks fell 0.1 percent after rallying to a record yesterday.

Market Measure

The 14-day relative strength index for the 10-year note dropped to 66 after rising yesterday to 72. A value above 70 indicates the yield may be poised to change direction. It was at 53 a week earlier.

“It’s a knee-jerk reaction to the soft print on Empire on the screen and a softer inflation profile,” said Jacob Oubina, senior economist in New York at Royal Bank of Canada’s RBC Capital Markets unit, one of 21 primary dealers that trade with the Fed.

The Fed Bank of New York’s general economic index declined to minus 1.4 in May from 3.1 in April. Readings less than zero signal contraction in New York, northern New Jersey and southern Connecticut. The median projection in a Bloomberg survey called for an increase to 4.

Output at factories, mines and utilities fell a more-than-forecast 0.5 percent after a revised 0.3 percent gain in the prior month that was weaker than previously reported, a report from the Fed showed today in Washington. The median forecast in a Bloomberg survey called for a 0.2 percent decline. Manufacturing, which makes up 75 percent of total production, decreased 0.4 percent, the third drop in the last four months.

Inflation Slows

The producer price index dropped by 0.7 percent last month, the biggest decrease since February 2010. It was forecast to drop 0.6 percent in April, according to a Bloomberg News survey before the report.

The yield gap between 10-year notes and Treasury Inflation Protected Securities, called the 10-year break-even rate, was at 2.29 percentage points, close to the 2013 low of 2.24 percentage points reached on May 9. It is down from this year’s high of 2.6 percentage points reached Feb. 4.

Central banks around the world have been buying bonds and cutting interest rates in a bid to boost growth and stave off the risk of deflation.

The Fed said after a policy meeting on May 1 it will keep buying bonds as long as the outlook for inflation doesn’t exceed 2.5 percent and as unemployment remains above 6.5 percent.

Fed Policy

The central bank is buying $85 billion of government and mortgage debt a month to support the economy by holding borrowing costs down. The Fed bought $916 million in notes maturing between August 2023 and February 2031 today. Fed policy makers meet on June 18-19.

Foreign holdings of Treasuries rose to $5.76 trillion in March, a 0.7 percent increase from the previous month, the smallest since December. Foreign investors held 50.5 percent of the $11.4 trillion in U.S. debt outstanding in March, the smallest since December.

China, the largest foreign lender to the U.S., decreased its holdings in Treasuries in March by $1.4 billion or 0.1 percent to $1.25 trillion. Japan, the second largest foreign lender to the U.S., reduced its holdings of U.S. government debt $0.5 billion to $1.105 trillion.

The Treasury is revising holdings data on a monthly basis rather than annually based on the nationality of the beneficial holder of the debt, while the initial data will still count the location of the purchase.

European Data

Gross domestic product in the 17-nation euro zone fell 0.2 percent after a 0.6 percent decline in the previous three months, the European Union’s statistics office in Luxembourg said today. The median estimates in a Bloomberg News survey was for a 0.1 percent contraction.

German GDP rose 0.1 percent in the first quarter from the last three months of 2012, when it fell a downwardly revised 0.7 percent, the Federal Statistics Office in Wiesbaden said today. Economists forecast a 0.3 percent gain.

Treasuries have dropped 1.1 percent this month as of yesterday, according to Bank of America Merrill Lynch indexes. The debt has lost 0.3 percent this year after gaining 2.2 percent in 2012.