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Treasury Gain Pushes Yield to Three-Week Low as Volatility Drops

June 27 (Bloomberg) -- Treasuries rose, sending benchmark 10-year yields to the lowest level in three weeks, as a Citigroup Inc. index showed U.S. economic data is failing to beat estimates before job data next week.

Ten-year notes headed for a second quarterly gain after the Federal Reserve cut its long-term forecasts for economic growth and its target interest rate this month. Data this week showed gross domestic product shrank more than analysts predicted. Fed Chair Janet Yellen last week affirmed policy makers’ plan to hold the benchmark rate near zero for a “considerable time.” A gauge of volatility in the Treasury market fell yesterday to the lowest since May last year.

“Yellen is dovish and first-quarter GDP data gives her a reason to continue to be dovish,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “It costs money to be short Treasuries. I think the market will struggle to sell off over the next few months.” A short position is a bet that asset prices will fall.

The 10-year yield fell two basis points, or 0.02 percentage point, to 2.51 percent at 6:46 a.m. New York time, according to Bloomberg Bond Trader data, the lowest level since June 2 and down from 2.72 percent on March 31. The 2.5 percent note due May 2024 gained 5/32, or $1.56 per $1,000 face amount, to 99 7/8.

The Citigroup Economic Surprise Index, which measures whether U.S. data are above or below market expectations, slid to minus 23.1 yesterday, the least since May 1, boosting demand for bonds.

Bond Returns

Treasuries returned 3.2 percent this year through yesterday, according to Bloomberg World Bond Indexes. German securities gained 4.8 percent, while Japan’s earned 1.5 percent.

“We have been consistently positive about the outlook for U.S. Treasuries,” said Yusuke Ito, a bond manager at Mizuho Asset Management Co. in Tokyo. A lower forecast for the Fed’s long-term target rate “is a strong message that growth for the U.S. economy going forward is not going to be as strong as they expected,” he said.

The benchmark yield will decline to 2.20 percent in the next three months, Ito said.

Fed officials at a June 17-18 meeting cut their long-run estimate for the target interest rate to 3.75 percent from 4 percent and lowered their prediction for long-term economic growth to a range of 2.1 percent to 2.3 percent, versus 2.2 percent to 2.3 percent forecast in March.

Fed Target

Policy makers said they expect interest rates to stay low for a “considerable time” after they end their bond-purchase program. The central bank left its target for overnight lending between banks in the range of zero to 0.25 percent, where it has been since December 2008.

Bank of America Merrill Lynch’s MOVE Index, which measures price swings in Treasuries based on options, declined one basis point to 53.25 basis points yesterday, the lowest since May 2013. The gauge has dropped from last year’s high of 117.89 basis points set in July.

Companies in the U.S. added 205,000 workers in June after hiring 179,000 the previous month, economists forecast before a July 2 report from ADP Research Institute. Labor Department data the following day will show payrolls increased by 210,000 in June, down from 217,000 last month.

U.S. GDP shrank at a 2.9 percent annualized rate in the first quarter, the worst reading since the same three months in 2009, the Commerce Department said June 25. Reports yesterday showed consumer spending rose less in May than economists predicted, and initial claims for jobless benefits were higher last week than analysts forecast.

Traders have cut to 54 percent the chance the central bank will raise its benchmark rate to at least 0.5 percent by July next year, down from 66 percent odds at the end of March, fed funds futures showed.

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