BLBG:Treasury Yields Within Three Basis Points of Six-Week High on Growth Signs
Treasury 10-year yields were within three basis points of the highest level in six weeks before a report this week forecast to show U.S. growth accelerated last quarter, adding to signs the economy is gaining momentum.
Benchmark notes held four days of declines as economists predicted a separate report this week will show employment growth helped boost household spending. The difference between two- and 10-year yields approached the widest since Dec. 7 before the Federal Reserve starts a two-day policy meeting after which it will provide forecasts for its benchmark interest rate for the first time.
“We are, over the course of the year, expecting further pressure on U.S. Treasuries as growth and the potential for inflationary pressures return,” said Michael McCarthy, chief market strategist at CMC Markets Plc in Sydney. “The break-out in the U.S. equities market together with the better economic data and particularly the better employment data,” is damping demand for Treasuries, he said.
The 10-year yield was little changed at 2.07 percent at 8:30 a.m. in London, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 traded at 99 13/32. The yield climbed to 2.09 percent yesterday, the highest since Dec. 8. The two-year yield was little changed at 0.24 percent.
The spread between two- and 10-year yields was 183 basis points today after widening to as much as 185 yesterday.
GDP Growth
Gross domestic product grew at a 3 percent annual rate in the fourth quarter after expanding 1.8 percent in the previous three months, according to economists surveyed by Bloomberg News before the Commerce Department’s Jan. 27 report. Household purchases (GDPCTOT) increased at a 2.4 percent annual pace from October through December, after rising 1.7 percent in the prior period, a separate survey showed.
Treasuries have returned a loss of 0.8 percent this month, including reinvested interest, according to a Bank of America Merrill Lynch index. Notes due in 10 years or more declined 3.5 percent, a separate index shows.
The Treasury will sell $99 billion of notes this week, starting with $35 billion of two-year securities today, $35 billion in five-year debt tomorrow and $29 billion of seven-year notes on Jan. 26.
The two-year notes yielded 0.25 percent in pre-auction trading, compared with 0.24 percent at the previous sale of the securities on Dec. 19, the lowest since August. Investors bid for 3.45 times the amount for sale last month, down from 4.07 times in November.
Rate Outlook
Demand for Treasuries was supported amid prospects policy makers will this week maintain their pledge to keep interest rates low. The Fed last week released blank templates showing the format of its forecasts for the benchmark rate, which will be provided to the public tomorrow.
The Fed said it will offer two charts along with the forecasts. The first will use shaded bars to show in which year participants in the Federal Open Market Committee project that the central bank will first raise rates. The second will show projections from each participant for the appropriate federal funds rate target at the end of the next three years.
“They’re probably going to err on the side of keeping policy accommodative to ensure recovery,” said Tony Morriss, head of interest-rate research in Sydney at Australia & New Zealand Banking Group Ltd. “This idea that short-term rates will remain low right in toward 2014, at face value, should argue for yields not to rise too far.”
‘Exceptionally Low’
The FOMC left its target for overnight loans between banks in a range of zero to 0.25 percent last month and reiterated that economic conditions may warrant “exceptionally low” rates at least through mid-2013. The central bank is forecast to keep the key rate unchanged tomorrow, according to economists in a Bloomberg survey.
The Fed is seeking to keep longer-term borrowing costs capped by selling $400 billion of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders have dubbed Operation Twist.
The central bank plans to purchase as much as $5 billion of debt maturing from January 2018 to November 2019 today as part of the program, according to the New York Fed’s website.
To contact the reporters on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
