(Bloomberg) -- The extra yield U.S. corporate bonds offer compared with Treasuries approached a six-year low as investors speculated the economy will pick up after the North American winter ends.
Bonds in an index of investment-grade company debt yielded 1.24 percentage points more than government securities on average, based on Bank of America Merrill Lynch indexes. The spread was 1.22 percentage points in January, the smallest difference since July 2007. The U.S. is scheduled to sell $109 billion of notes this week. Snow and ice storms have pummeled the eastern U.S. this year, depressing the economy as data on retail sales and employment were weaker than forecast.
The data is going to get increasingly important as it gets clean from the weather-related effects but it seems a little bit early still, said Craig Collins, managing director of rates trading at Bank of Montreal in London. At these yield levels I think market auctions should go fine. If we see any significant concession into supply, I think it will probably be seen as a buying opportunity.
Benchmark 10-year yields were little changed at 2.73% as of 6:53 a.m. New York time, Bloomberg Bond Trader data show. The price of the 2.75% note maturing in February 2024 was 100 6/32.
Treasuries have returned 1.6% this year through Feb. 21, versus 2.3% for U.S. investment-grade company debt, based on Bloomberg indexes.
WEATHER IMPACT
Moodys Investors Service has made 149 upgrades to investment-grade companies and nine downgrades in 2014, according to data compiled by Bloomberg.
Figures this week will show new home sales and orders for durable goods declined in January, while growth in gross domestic product was slower in the fourth quarter than the government estimated last month, based on Bloomberg News surveys of economists.
The U.S. plans to sell $32 billion of two-year debt tomorrow, $13 billion in two-year floating-rate notes and $35 billion in five-year securities on Feb. 26, and $29 billion of seven-year debt the next day.
Slow U.S. inflation means the Federal Reserve will keep its benchmark interest rate near zero, said Hideaki Kuriki, a bond investor at Sumitomo Mitsui Trust Asset Management Co. The outlook for steady monetary policy has led to reduced volatility in Treasuries, he said.
FLUCTUATION SUBSIDE
Three-month implied volatility on U.S. 10-year yields based on options was little changed at 69.23 basis points after falling to 68.76 basis points on Feb. 21, the lowest level since May, according to data compiled by Bloomberg. The average over the past year is 83.7 basis points. The gauge is a measure of projected yield fluctuations over the next 90 days.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, an indication of trader expectations for consumer prices over the life of the debt, was 2.15 percentage points. The average for the past decade is 2.21 percentage points.
The American economy is recovering with low inflation, said Kuriki, who is based in Tokyo for Sumitomo Mitsui Trust, which has the equivalent of $40.9 billion in assets. Monetary policy will stay in place. Ten-year yields will be in a range of 2.6% to 2.9% for the next two to three months, he said.
POSITIONS REDUCED
Futures traders trimmed short positions in 10-year Treasuries, or bets the notes will decline.
Net shorts fell by 85,389 contracts, or 60%, in the seven days ended Feb. 18 from the week before, according to U.S. Commodity Futures Trading Commission data on Feb. 21. It was the steepest decline in the number of shorts since March.
Fed Chair Janet Yellen is scheduled to deliver testimony to the U.S. Senate on Feb. 27, after it was postponed due to the severe weather. The Fed cut its bond-buying program by $10 billion a month in January and again in February, with the purchases currently at $65 billion.
Policy makers have kept their target for federal funds, or overnight loans between banks, in a range of zero to 0.25% for five years to support the U.S. economy. The odds of an increase to 0.5% or more by January are about 11%, based on futures contracts.
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