(Bloomberg) — The difference between yields on U.S. five-year notes and 30-year bonds narrowed to the lowest in almost six years as below-target inflation makes longer-term securities relatively more attractive.
Treasuries fell earlier after the U.S. reported faster-than-forecast jobs gains on Dec. 5. The Federal Reserve’s preferred gauge of price pressures hasn’t been above the U.S. central bank’s 2 percent inflation target since March 2012. The U.S. plans to sell $59 billion of notes and bonds this week.
“The long end has mainly traded on inflation expectations coming way down in the U.S. and globally,” said Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “Friday’s labor-market report exceeded expectations considerably and caused the flattening.”
The difference between yields on U.S. five-year notes and 30-year bonds, which reflects market trends with less influence from the Fed, which has held short-term rates at virtually zero since December 2008, narrowed to as low as 1.25 percentage points, the least since January 2009, at 8:52 a.m. New York time.
Benchmark 10-year note yields dropped one basis point, or 0.01 percentage point, to 2.30 percent, according to Bloomberg Bond Trader prices. The yield rose 14 basis points last week.
The Treasury is scheduled to sell $25 billion of three-year notes tomorrow, $21 billion of 10-year debt the next day and $13 billion of 30-year bonds Dec. 11.
The difference between yields on 10-year notes and similar-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 174 basis points, touching the lowest level in three years.
The Fed will raise its benchmark in about 8 1/2 months, based on data compiled by Morgan Stanley. The median forecast by analysts in a Bloomberg survey is for a 25 basis-point rate increase in the second quarter of next year.
“With the front end suffering from anxiety about the Fed and disinflation pressures on the rise, the long-end of the curve continues to be the safe harbor,” Ward McCarthy and Thomas Simons at Jefferies wrote in a report on Dec. 5. The New York-based company is another primary dealer.
See also: 30-Year Treasury Bond Is Back.
Low long-term rates help borrowers but hurt returns on the fixed-income investment portfolios that insurers use to back products that offer long-term guarantees, such as term life insurance, annuities, long-term disability insurance policies and long-term care insurance policies.
The U.S. added 321,000 jobs in November, a government report showed Dec. 5, exceeding the most optimistic projection in a Bloomberg News survey of economists. The gain followed a 243,000 advance in October that was stronger than previously reported. The jobless rate held at a six-year low of 5.8 percent. Average hourly earnings rose 0.4 percent, the most since June of last year.
The personal consumption expenditures index rose 1.4 percent in October from the same period a year ago.
Reports in the U.S. this week will show retail sales rose in November while costs for imported goods and producer prices fell, based on Bloomberg surveys of economists.
–With assistance from Anchalee Worrachate in London.