July 2, 2013 Bloomberg News

By Wes Goodman and Lucy Meakin

U.S. 10- to 30-Year Yield Gap Shrinks as Inflation Seen in Check

The difference between 10- and 30- year Treasury yields approached the narrowest in 17 months on speculation inflation will stay in check as the Federal Reserve scales back efforts to spur economic growth.

The spread was 1 percentage point today, down from this year’s high of 1.26 percentage points on April 1, data compiled by Bloomberg show. Longer maturities are more influenced by the outlook for prices. While U.S. government securities have handed investors a loss of 2.5 percent this year, Treasury Inflation Protected Securities tumbled 7.9 percent, Bank of America Merrill Lynch indexes show. Economists say reports today will show factory orders and vehicle sales rose.

“The economy is not growing fast enough to bring on an inflation acceleration,” said Marc Fovinci, head of fixed income in Portland, Oregon, at Ferguson Wellman Capital Management Inc., which has $3.5 billion in assets. “I certainly wouldn’t be a holder of TIPS.”

The benchmark 10-year yield fell two basis points, or 0.02 percentage point, to 2.46 percent at 8:44 a.m. London time, according to Bloomberg Bond Trader prices. The 1.75 percent note due in May 2023 rose 5/32, or $1.56 per $1,000 face amount, to 93 26/32. Even after climbing from the record low of 1.38 percent set almost a year ago, the yield is still less than the average of 3.56 percent for the past decade.

The spread between 10- and 30-year yields contracted to 97 basis points on June 24, the least since Jan. 3, 2012, data compiled by Bloomberg show.

Favoring Corporates

Ferguson Wellman favors corporate bonds for their higher yields versus Treasuries, Fovinci said. The company’s recent purchases include Yum! Brands Inc., Intel Corp., Emerson Electric Co. and Wells Fargo & Co., he said.

Investors should avoid the longest maturities because yields have been too low, said Kathy Jones, a New York-based fixed income strategist at Charles Schwab & Co., which has $2.11 trillion in client assets.

“You should be in shorter- to intermediate-term bonds,”Jones said yesterday on Bloomberg Radio’s “The Hays Advantage”with Kathleen Hays and Vonnie Quinn. “They’ll be a lot less volatile. Then as the rate environment changes and those bonds mature, you’ll have some money to reinvest at higher rates.”

Ten-year yields may rise to about 3 percent by the first quarter of next year, Jones said.

The difference between yields on 10-year notes and similar- maturity TIPS, a gauge of expectations for consumer prices over the life of the debt, was little changed at 2.03 percentage points. The average over the past decade is 2.21.

Volume Declines

Treasury trading volume at ICAP Plc, the largest inter- dealer broker of U.S. government debt, fell 44 percent yesterday to $250.9 billion, the least since May 7. June’s average was

$446.2 billion.

Volatility in Treasuries as measured by the Merrill Lynch Option Volatility Estimate MOVE Index was 101.32 yesterday. It climbed to 110.98 on June 24, the highest since November 2011.

The Fed is buying $85 billion of Treasuries and mortgage- backed securities each month to support the economy by putting downward pressure on borrowing costs. Chairman Ben S. Bernanke said on June 19 that policy makers may begin slowing bond purchases this year if the economy achieves the sustainable growth the central bank has sought since the last recession ended in 2009.