Treasurys rallied, driving 10- and 30-year yields to the lowest levels this year, on speculation lawmakers will break a deadlock over raising the nation’s debt limit and avoid defaulting on the nation’s $9.34 trillion of marketable debt outstanding.
Returns on U.S. government debt have recouped all of their June losses as the government said today U.S. gross domestic product grew more slowly than forecast in the second quarter. At the same time, rates on bills maturing just after the Aug. 2 debt ceiling deadline rose for a seventh straight day. The U.S. would delay quarterly auctions of U.S. notes and bonds if there’s no extension of the cap before next week, a dealer said.
“No one expects the U.S. will not be paying its debt,” said David Semmens, a U.S. economist at Standard Chartered Bank in New York.
“As we get into the weekend, people will be focused on getting a resolution to the debt crisis, but it also brings the focus back to the weak economic growth we are seeing.”
Yields on 10-year notes tumbled 16 basis points, or 0.16 percentage point, to 2.79 percent at 3:20 p.m. in New York, according to Bloomberg Bond Trader prices. They touched 2.78 percent, the lowest level since Nov. 30. Yields are down 18 basis points this week and 38 basis points this month, the most since August. The 3.125 percent securities maturing in May 2021 climbed 1 12/32, or $13.75 per $1,000 face amount, to 102 28/32.
Thirty-year bond yields slid 13 basis points to 4.12 percent, the lowest level since Dec. 1. They were poised for a weekly decrease of 14 basis points and a monthly drop of 25 basis points, the most since August.
Two-year note yields fell six basis points to 0.36 percent.
Rates on the $90 billion of six-month bills due Aug. 4 reached 0.3 percent, the highest since they were issued.
The Treasury Department met with primary dealers in New York today to discuss next month’s quarterly auctions of notes and bonds and the $14.3 trillion debt ceiling. The department canceled its regularly scheduled individual meetings, it said in a statement.
The government would delay auctions and issue short-term cash-management bills if there’s no debt deal, said James Caron, head of U.S. interest-rate strategy at the primary dealer Morgan Stanley in New York after the meeting.
“There was a general consensus among all participants that Congress should act as quickly as possible to raise the debt ceiling for as long a period as possible to lift the cloud of uncertainty from the economy,” Treasury said in the statement.
Treasurys, which have returned 1.12 percent this month as measured by Bank of America Merrill Lynch indexes, fluctuated this week as the standoff between President Barack Obama and House Speaker John Boehner threatened America’s top credit rating.
Standard & Poor’s placed the U.S. AAA rating on “CreditWatch” July 14, saying there’s a 50 percent chance it would be cut in the next 90 days even if an agreement is reached by the deadline. S&P said it needs to see “a credible solution to the rising U.S. government debt burden.”
The spread between two- and 10-year yields decreased to 2.44 percentage points, the narrowest level since Dec. 3, after the Commerce Department reported that GDP grew at a 1.3 percent annual rate from April through June after a 0.4 percent gain in the prior quarter that was less than previously estimated. The median forecast of economists surveyed by Bloomberg News called for a 1.8 percent increase.
“This puts all the economic bulls back into the bull pen,” said George Goncalves, head of interest rate strategy at Nomura Holdings Inc., one of 20 primary dealers that trade directly with the Federal Reserve.
“This data is the capping stone that confirms the weak trend of data.”
House Republicans said they have the votes today to pass Boehner’s proposal to raise the debt cap and cut spending. Obama, who opposes it, said at the White House the time for compromise is “now.”
Senate Majority Leader Harry Reid said he will take action to move to a vote on his competing plan, and at the same time held out hope for a deal with Republican leaders.
“Washington is a mess,” said James Combias, New York- based head of Treasury trading at the primary dealer Mizuho Securities USA Inc. “We’ll be dealing with the fundamentals, weaker growth here and globally.”
The Obama administration will brief the public no earlier than the close of financial markets today on priorities for paying the nation’s obligations if the limit isn’t raised by then, a Democratic official said.
Precedence will be given to making interest payments on government bonds, an administration official said yesterday.
Rates for borrowing and lending securities in the repurchase-agreement, or repo, market increased to the highest level in five months amid the government stalemate over raising the nation’s debt ceiling.
The average level of overnight general collateral repo rates traded through ICAP Plc was 0.21 percent at 10 a.m. in New York, when most trading takes place, the highest since Feb. 2.
The Commerce Department revised U.S. economic growth in the first quarter was down from a 1.9 percent prior estimate, reflecting fewer inventories and more imports. Household purchases, about 70 percent of the economy, rose 0.1 percent.
The Fed bought $2.72 billion of Treasurys due from February 2014 to December 2014. The central bank is investing the principal payments from its debt holdings in Treasurys to help spur the economy.
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