BLBG: Treasury Yields Near Two-Week High on Recovery Signs, Stocks
By Yasuhiko Seki
June 16 (Bloomberg) -- Treasury 10-year yields were near the highest level in almost two weeks as signs the global economy is recovering boosted stocks and reduced demand for the safest assets.
Treasuries were poised for their first three-day decline in two months before reports forecast to show U.S. industrial output grew and jobless claims fell, indicating the world’s largest economy is gathering momentum. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, widened after Federal Reserve Bank of St. Louis President James Bullard said he saw substantial inflation risk in the medium term.
“Data continue to support the view that the global economy is cyclically recovering,” said Makoto Hatta, manager of fixed income in the global securities investment department at Sompo Japan Insurance Co., Japan’s third-largest casualty insurer. “Bond yields have already fallen to levels that are too low from the viewpoint of economic fundamentals.”
The yield on the 10-year note fell one basis point to 3.30 percent as of 6:47 a.m. in London, according to BGCantor Market Data. It climbed to 3.32 percent on each of the past four trading days, the highest level since June 4. The 3.5 percent security maturing in May 2020 rose 2/32, or 63 cents per $1,000 face amount, to 101 22/32.
Industrial Output
Industrial production increased 0.9 percent in May, after gaining 0.8 percent the prior month, according to a Bloomberg survey before the Fed report today. Initial jobless claims fell 6,000 to 450,000 last week, a separate survey showed ahead of Labor Department data tomorrow.
Treasuries declined yesterday as the Standard & Poor’s 500 Index erased its loss for the year after a report showed New York-area manufacturing expanded for an 11th month.
The MSCI Asia Pacific Index of shares rose 1.1 percent today and the Nikkei 225 Stock Average gained 1.8 percent, climbing above 10,000 points for the first time since May 20.
“With extreme concerns that the debt crisis in Europe will derail the global recovery easing for now, investors are set to unwind some positions on safer assets,” said Kazumasa Yamaoka, a senior analyst in Tokyo at GCI Capital Co., an investment advisory firm.
Default Swaps
The cost of protecting Asia-Pacific corporate and sovereign bonds from non-payment fell, according to traders of credit- default swaps.
The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan declined 5 basis points to 133 basis points in Singapore, Royal Bank of Scotland Group Plc prices show. A basis point is 0.01 percentage point.
Credit-default swap indexes are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.
“There are flickering signs that the financial markets may settle down and refocus on fundamentals,” said Kazuhito Miyabe, head of foreign fixed income in Tokyo at Toyota Asset Management Co., a unit of the world’s largest automaker. “It would not be a surprise if bond yields rose to price in improvement in economic fundamentals.”
The spread between yields on 10-year TIPS and similar- maturity notes show money managers expect the consumer price index to increase an average 2.06 percent annually in the next 10 years, the most since June 3. The so-called breakeven rate has risen from 1.83 percent on May 21.
‘Inflation Risks’
“In the medium term we do have very substantial inflation risk in the U.S. because of substantial fiscal deficits and ultra-aggressive monetary policy,” Bullard said in Hong Kong yesterday.
Fed officials may trim forecasts for economic growth when they meet next week as Europe’s debt crisis saps demand for American goods and roils financial markets.
Central bankers may reduce their 2010 estimates by “several tenths” of a percentage point and as much as 0.75 point for 2011, former Fed Governor Lyle Gramley said. That would mark a reversal from April, when officials raised their projections for this year to a range of 3.2 percent to 3.7 percent and left 2011 and 2012 forecasts little changed.
The new estimates are likely to reinforce the Fed’s pledge, in place since March 2009, that interest rates will stay low for an “extended period,” said former Fed researcher John Ryding.
The Federal Open Market Committee meets in Washington on June 22-23.
“The Fed is apparently in no hurry to normalize interest rates,” said Koichi Kurose, chief strategist at Resona Bank Ltd, a unit of Japan’s fourth-largest banking group in Tokyo. “This rate outlook will help Treasury yields to stay low.”
Futures on the CME Group Inc. exchange show a 28 percent chance the Fed will raise its benchmark rate by at least a quarter-percentage point by its December meeting, down from 40 percent odds a month earlier.
To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.
