BLBG: Treasuries Rise as Dudley Says Bond Buying Won't Cause Inflation Problem
Treasuries rose, snapping the steepest two-day selloff since January 2009, after Federal Reserve Bank of New York President William Dudley said the central’s bank bond purchases won’t cause an inflation problem.
Government securities also rose on speculation a monthly U.S. report tomorrow will show the increase in consumer prices is slowing. Investors should buy 10- and 30-year Treasuries, Barclays Capital Inc. said in a report. Benchmark 10-year rates jumped 31 basis points over the previous two trading days, the most since a back-to-back surge of 33 basis points 21 months ago.
“Inflation isn’t very strong,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “The consumer-price figures may mark a turning point for the market,” reversing a month-long selloff, he said. BNP and Barclays are two of the 18 primary dealers that are authorized to trade directly with the Fed.
Yields on 10-year notes fell five basis points to 2.91 percent as of 6:14 a.m. in London, according to data compiled by Bloomberg. The 2.625 percent security due in November 2020 advanced 13/32, or $4.06 per $1,000 face amount, to 97 1/2.
Dudley was responding to criticism that the Fed’s plan to add $600 billion to the economy by buying Treasuries will lead to higher prices for consumers.
“People do not understand clearly” that “we can have an enlarged balance sheet and not have a long-term inflation problem,” he said in an interview with CNBC.
Fed Buying
The central bank is scheduled to purchase $4 billion to $6 billion of securities maturing from May 2012 to May 2013 today under the plan, according to its website.
The cost of goods and services excluding food and energy rose 0.7 percent in October from a year earlier, according to a Bloomberg survey before tomorrow’s Labor Department report. The figure would be the smallest year-over-year gain since 1961.
Separate data today will show industrial production and wholesale prices rose last month, Bloomberg surveys show.
Treasuries tumbled yesterday as a group of analysts urged the Fed to halt its bond purchases.
“It was a massive selloff,” BNP’s Fujiki said.
The move has been “somewhat too sharp,” Barclays Capital’s Ajay Rajadhyaksha and Dean Maki in New York wrote in their report dated yesterday.
The Fed debt program has ignited a debate about the value of bonds because the central bank said on Nov. 3 the purchases aim to support the economic recovery and elevate the inflation level. Increases in costs for goods and services erode the value of the fixed payments from bonds.
Debasement Risk
“The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment,” the analysts wrote in a note to be published this week in the Wall Street Journal and New York Times.
John Taylor, the Stanford University professor who created a monetary-policy formula used by the Fed, is among the group of 23 who signed the open letter to central bank Chairman Ben S. Bernanke.
Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., reduced holdings of government-related debt to the lowest level since July 2009 and added mortgage-related debt in October.
The $256 billion Total Return Fund’s investment in government-related securities fell to 28 percent of assets from 33 percent the previous month, according to data the Newport Beach, California, company published on its website yesterday.
Monthly Loss
Treasuries have dropped 1.4 percent in November, following a 0.2 percent slide in October, according to Bank of America Merrill Lynch data. Government securities haven’t fallen for two straight months since they slid in April, May and June of 2009, when signs of economic improvement were eating into demand for the relative safety of U.S. debt.
Net purchases of long-term U.S. notes, bonds and stocks by investors outside the nation probably declined to $62.5 billion in September from $128.7 billion in August, according to the median forecast in a Bloomberg News survey before the Treasury Department reports the figure today.
Fed Vice Chairman Janet Yellen said the central bank isn’t trying to weaken the dollar or push the inflation rate higher than 2 percent.
The bond-buying program is justified because of low costs in the economy and 9.6 percent unemployment, Yellen said in an interview with the Wall Street Journal that the newspaper said was conducted last week.
The difference between yields on U.S. 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, has widened to 2.09 percentage points from this year’s low of 1.47 percentage points in August.
The latest reading matches the 10-year average.
U.S. 10-year notes yielded 1.81 percent after accounting for consumer prices, versus 1.63 percent in Japan. As recently as January, Japan’s real yield was 2.18 percentage points more than what was available from Treasuries.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.
