BLBG:Treasuries Snap Loss on Speculation Data to Show Consumer Prices in Check
Treasuries snapped yesterday’s steepest decline in two weeks before government data forecast to show consumer-price inflation was under control at the end of last year.
A $15 billion sale of 10-year Treasury Inflation Protected Securities set for today is poised to draw a negative yield for the first time. The U.S. is also scheduled to announce the size of two-, five- and seven-year auctions planned for next week. Yields on conventional 10-year notes were 22 basis points away from a record low, reflecting demand for Treasuries during Europe’s debt crisis.
“There still is a large appetite for Treasuries,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. BNP’s U.S. unit is one of the 21 primary dealers that trade directly with the Federal Reserve. “Inflation is in check.”
Ten-year yields held at 1.89 percent as of 6:48 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent security maturing in November 2021 changed hands at 100 31/32. The rate increased four basis points, or 0.04 percentage point, yesterday, the most since Jan. 3. The record low yield was 1.67 percent on Sept. 23.
Japan’s 10-year yields rose 1/2 basis point to 0.97, climbing for a third day.
Consumer Prices
The U.S. consumer price index probably increased 0.1 percent in December from the previous month, according to the median forecast of 78 economists surveyed by Bloomberg News before the Labor Department data due today. The gauge was unchanged in November.
Other reports today may show housing starts dropped from the highest level in more than a year, fewer Americans filed claims for jobless benefits and Philadelphia-area manufacturing expanded, separate Bloomberg surveys indicate.
The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer costs over the life of the debt, was 2.06 percentage points. The average over the past decade is 2.13 percentage points.
U.S. gross domestic product growth is threatening to send Treasury yields higher as the world’s biggest economy withstands a slowdown in Europe, where officials are struggling to cut spending and attract investors to their debt.
“The current yield is too low,” said Yoshiyuki Suzuki, who helps oversee the equivalent of $71.7 billion as the head of fixed income at Fukoku Mutual Life Insurance Co. in Tokyo. “It’s not attractive at all. The U.S. economy isn’t bad.” A yield of 2.5 percent would be “fair value,” he said.
The World Bank said this week that the U.S. economy will grow 2.2 percent this year, while the euro area will contract 0.3 percent.
‘Fair or Rich’
Investors demand 11 basis points to buy 10-year Treasuries instead of same-maturity German bunds. The two rates were about even at the start of 2012.
The 10-year TIPS being sold today yielded negative 0.08 percent in pre-auction trading, versus positive 0.099 percent at the previous sale of the securities on Nov. 17.
Current levels are “either fair or rich,” BNP said in a report today by strategists including Cyril Beuzit, the London- based global head of interest-rate strategy at the company.
Investors bid for 2.64 times the amount of debt offered two months ago, versus the average of 2.79 for the past 10 auctions. Indirect bidders, the class that includes foreign central banks, bought 46.3 percent of the notes, the most in a year.
Negative Yield
TIPS offer both the relative safety of U.S. securities and protection in case Fed efforts to spur growth lead to higher costs in the economy. The securities have returned 14 percent in the past year, versus 9.9 percent for conventional Treasuries, according to Bank of America Merrill Lynch data.
Existing 10-year TIPS yielded negative 0.23 percent today, poised for the lowest close ever. The rate is being kept down by central bank purchases, said Francois Savary, chief investment officer for Reyl & Cie Ltd., a Geneva-based bank for the wealthy with the equivalent of $4.8 billion in assets.
“You need to take into account the fact that there were huge interventions by the Federal Reserve in the Treasury market, and that there is a distortion in the inflation-linked- bonds yield,” Savary said during a trip to Singapore. “The Fed will do everything to avoid significant upward pressure” on Treasury yields.
‘Huge Interventions’
The central bank is replacing $400 billion of shorter- maturity Treasuries, including TIPS, in its holdings with longer-term debt to cap borrowing costs under a plan announced in September. It plans to buy as much as $5 billion of notes due from January 2018 to November 2019 today, according to the Fed Bank of New York website.
Next week’s auctions will consist of $35 billion of two- year notes on Jan. 24, $35 billion of five-year debt on the following day and $29 billion of seven-year securities on Jan. 26, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance.
The amounts would be the same as the last time the government sold the securities in December.
To contact the reporters 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
