* U.S. Midwest business data weaker-than-expected
* Euro zone worries grow as Spanish economy shrinks
* Month-end index buying seen adding bids for bonds
* Treasuries set highest gain among US bonds in April
By Richard Leong
NEW YORK, April 30 (Reuters) – U.S. Treasury debt prices
rose on Monday as anxiety over economic weakness in Europe and
slowing growth in the United States led investors to favor
lower-risk investments over stocks and other risky assets.
A weaker-than-expected private report on business activities
in the Chicago region in April fueled jitters that the world’s
biggest economy is experiencing a spring deceleration for a
third straight year. That could trigger another round of large
scale bond purchase from the Federal Reserve.
The Institute for Supply Management-Chicago said its index
on upper Midwest business activity fell to 56.2 in April, the
lowest since November 2009.
“Growth is beginning to fade around the world,” said Justin
Hoogendoorn, fixed income strategist at BMO Capital Markets in
Chicago.
Last Friday, the government reported U.S. gross domestic
product from January to March grew at an annualized 2.2 percent,
weaker than expected and slower than the 3.0 percent pace posted
in the last quarter of 2011.
The March figures on U.S. personal spending and income
showed a resilient consumer sector, which accounts for
two-thirds of the U.S. economic activity. They might not be
enough, however, to stem further slowing in overall growth.
Worries about Europe slipping into a recession intensified
after Spain’s economy contracted in the first three months of
the year. Spain’s fiscal woes deepened after Standard & Poor’s
cut the credit ratings of 11 Spanish banks on Monday following
its downgrade of Spain last week.
“Everyone knows the negatives. No one sees the answers yet,”
said Carl Kaufman, portfolio manager at Osterweis Capital
Management in San Francisco, which oversees about $5 billion.
On below-average trading volume, benchmark 10-year notes
traded up 4/32 in price to yield 1.92 percent, down
more than 1 basis point from late on Friday. Thirty-year bonds
rose 6/32 in price for a 3.11 percent, down 1 basis
point from Friday’s close.
Bets grew on more central bank help to avert a recession
across Europe. Treasuries slightly lagged German Bunds with
their 10-year yield premium over 10-year Bunds
widening about 1 basis point near 25 basis points.
Purchases from fund managers to rebalance their portfolios
at month-end should keep benchmark yields at their lowest levels
since early February, analysts said.
The 10-year yield is on track to fall nearly 30 basis
points, its biggest monthly decline since September, while the
30-year yield is set to fall 23 basis points, the first drop in
four months, according to Tradeweb.
After a dismal first quarter, Treasuries staged a comeback
in April on revived worries about the festering euro zone debt
crisis and signs of slowing U.S. economic growth.
Through Friday, Barclays’ Treasuries total return index has
risen 1.38 percent in April, making it the best U.S. bond
category in April. It also wiped out its first-quarter loss,
bringing its year-to-date result into positive territory.
Another supportive factor for longer-dated Treasuries is the
ongoing purchases from the Federal Reserve for “Operation
Twist,” which is its $400 billion program aimed to hold down
mortgage rates and other long-term borrowing costs.
The Fed bought $1.83 billion in government debt due in Feb
2036 to August 2041. It will announce its next schedule at 2
p.m. (1800 GMT).
“People think as long as the Fed has their back, everything
will be fine,” Osterweis’ Kaufman said.
While the recent spate of disappointing data on the U.S. and
Europe has supported demand for Treasuries, analysts said the
figures are not dire enough to push yields into a new, lower
trading range because longer inflation expectations have
remained in line with the Fed’s implicit target of 2 percent.
“Without inflation expectations falling, it would be tough
for 10-years (Treasuries) to rally much further,” BMO’s
Hoogendoorn said.
