Bonds renew rally after weak consumer data

By Richard Leong

NEW YORK (BestGrowthStock) – U.S. Treasuries rose on Friday, led by the 30-year bond, as weaker-than-expected data on consumer inflation and spending rekindled this week’s rally in advance of the Federal Reserve’s bond purchase program.

Bonds pared gains briefly after a report from Thomson Reuters and the University of Michigan showed a modest recovery in consumer sentiment so far in August following a sharp deterioration in July.

Less consumer gloom was not enough to dispel the view that the economy is slowing and might require more help from the U.S. central bank, analysts said.

As a result, appetite for longer-dated bonds returned, after a drop-off Thursday. Investors scrambled for investments that offer higher returns than cash and short-dated debt and more safety than stocks and other risky assets, they said.

“Accounts are looking to extend duration because they think rates will stay low here,” said Suvrat Prakash, an interest rate strategist at BNP Paribas in New York.

Adding to the strength in 30-year bonds were more “flattener” trades that involves buying the long bond and selling 10-year and other shorter maturities, analysts said.

These flatteners helped narrow the spread between 10-year and 30-year yields to 118 basis points midday Friday, a level not seen in a week. It had reached a record wide of 128 basis points two days earlier.

The yield on 30-year Treasuries fell to 3.89 percent, the lowest level in about three weeks and down from 3.94 percent late on Thursday.

The long bond is on track for its best single-week performance in five weeks in the aftermath of Thursday’s $16 billion auction of 30-year supply, which was part of this week’s $74 billion quarterly refunding.

The benchmark 10-year note was up 13/32 in price to yield 2.70 percent, down 2.75 percent late on Thursday but above a 16-month low of 2.68 percent set on Wednesday.

In other trading activity, there was a pick-up in buying of older Treasury issues, as traders looked to profit from the U.S. central bank reentry into the bond market, analysts said.

The Fed is scheduled to buy $18 billion of government debt starting next week to mid-September. The first purchase operation on Tuesday will target issues maturing from August 2014 to July 2016.

The Fed said earlier this week it will use money from maturing mortgage securities to buy government bonds in an attempt to lower long-term interest rates to stimulate lending and investments. Loan demand and capital investments have been stuck at anemic levels, bogging down the recovery.

Friday’s data on consumer prices and spending showed the biggest component of the U.S. economy remains sluggish.

U.S. retail sales rose 0.4 percent in July, while the consumer price index rose 0.3 percent, the government reported.

Analysts polled by Reuters expected retail sales to grow by 0.5 percent last month and the CPI to rise by 0.2 percent.

(Reporting by Richard Leong; Editing by Paul Simao)

Bonds renew rally after weak consumer data