May 28 (Bloomberg) -- U.S. 30-year bonds headed for a fifth monthly advance, the longest since 2006, as slow inflation and mixed economic data underpinned demand for long-term debt.
Five-year notes were little changed yesterday while long bonds rallied before the government auctions $35 billion of 2019 debt today. The U.S. will also sell $13 billion of two-year floating-rate securities. The Federal Reserve will probably begin increasing interest rates in the second half of next year, Fed Bank of Atlanta President Dennis Lockhart said yesterday.
“Long-dated Treasuries outperformed because of the perception that the U.S. is going to have moderate growth without inflationary pressure,” said Salman Ahmed, a London- based global strategist at Lombard Odier Asset Management, which oversees $48 billion. “Or at least, that’s what the Fed is saying.”
The benchmark 10-year yield fell one basis point, or 0.01 percentage point, to 2.50 percent at 7:12 a.m. New York time after dropping to 2.49 percent, the lowest since May 16, according to Bloomberg Bond Trader data. The 2.5 percent note due in May 2024 rose 1/8, or $1.25 per $1,000 face amount, to 99 31/32.
Thirty-year yields have fallen to 3.35 percent from 3.97 percent at the end of 2013. The last time the yield dropped for five months or longer was from June to November of 2006.
Bonds also rose this year as violence in Ukraine drove demand for safety and the U.S. winter slowed the economy.
Treasuries maturing in a decade and longer have returned 12 percent in 2014, based on the Bloomberg World Bond Indexes. The Bloomberg Global Developed Sovereign Bond Index gained 4 percent.
“Money is shifting to the longer end,” said Kazuaki Oh’e, a debt salesman at CIBC World Markets Japan Inc. in Tokyo. “If you think the Fed is going to raise rates, then short-term yields are going up, but not the longer end. Inflation is going to be kept in check if the Fed is going to raise interest rates.”
Investor appetite is increasing as May ends because fixed- income fund managers are buying to align their holdings with the benchmark indexes, CIBC’s Oh’e said. The benchmarks adjust at the end of every month to incorporate the debt issued at the latest sales.
U.S. employment and housing starts rose, while retail sales lagged expectations and figures on manufacturing were mixed, data showed this month. Orders for durable goods unexpectedly climbed in April, according to a government report yesterday.
Bidding climbed at a $31 billion two-year sale yesterday amid speculation a rate increase isn’t imminent.
The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 3.52, the highest level since February at the monthly sales. The government plans to conclude this week’s auctions with $29 billion of seven-year securities tomorrow.
The five-year notes scheduled for sale today yielded 1.55 percent in pre-auction trading, compared with 1.732 percent at a previous auction on April 23.
The latest data aren’t weak enough to push yields lower, said Hideo Shimomura, chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., which has the equivalent of $68.6 billion in assets.
“There’s little room for Treasuries to rally,” he said. “There’s no momentum in the U.S. economy, but there hasn’t been a significant downturn in the indicators.”
The Fed is slowing the pace of the bond purchases it uses to fuel growth, while keeping its benchmark interest rate close to zero since 2008. In its rate projections issued March 19, the median year-end estimate among policy makers was 1 percent for 2015 and 2.25 percent for 2016.
The central bank’s preferred gauge of inflation has been below its 2 percent target for almost two years.
“It’s too early to conclude that the inflation trend is sustainably closer to target, but the risks associated with disinflation do appear to have receded,” Lockhart said at Louisiana State University in Baton Rouge. Lockhart is scheduled to vote on monetary policy next year.
Related News and Information: Bloomberg World Bond Indexes: WBIX
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