BLBG:Treasuries Fall as Economists Project Report to Show Fourth-Quarter Growth
Treasuries fell, snapping a two-day rally that sent five-year yields to a record low yesterday, as economists predicted a government report today will show U.S. growth quickened at the end of last year.
The 30-year bond led declines on bets the Federal Reserve’s pledge to keep its benchmark interest rate low through late 2014 will spur inflation. Five-year inflation swaps, which allow investors to exchange fixed interest rates for returns equivalent to the consumer price index (MXWD), rose to 2.26 percent yesterday, the most since August. The average for the past five years is 2.11 percent.
“Market focus is on the advanced reading of fourth-quarter GDP,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Macro news has largely been positive for risk sentiment, and strong data may weigh on Treasuries.”
Thirty-year yields were four basis points, or 0.04 percentage point, higher at 3.13 percent as of 10:22 a.m. London time, according to Bloomberg Bond Trader prices. The 3.125 percent securities maturing in November 2041 fell 3/4, or $7.50 per $1,000 face amount, to 99 28/32. The rate rose three basis points this week.
Five-year rates added one basis point to 0.78 percent today versus the record of 0.75 percent set yesterday. Ten-year yields were three basis points higher at 1.97 percent.
Treasuries have handed investors a 0.2 percent loss in 2012 through yesterday, compared with a 0.3 percent decline at the same point last year, according to indexes compiled by Bank of America Merrill Lynch.
Accelerating U.S. Growth
Europe’s sovereign debt crisis and the threat of a U.S. economic slowdown combined to give Treasuries a 9.8 percent return last year, the most since 2008.
U.S. GDP grew at a 3 percent annual pace in the fourth quarter, after advancing 1.8 percent in the previous three months, according to the median forecast of 79 economists surveyed by Bloomberg News before the Commerce Department issues the figure at 8:30 a.m. local time in Washington.
“We’re going to get better numbers” in today’s gross domestic product report, said Kazuaki Oh’e, a debt salesman in Tokyo at CIBC World Markets Japan Inc., a unit of Canada’s fifth-largest lender. “With the Fed easing, it’s good for the economy. Investors may favor corporate bonds and other credit products over the safety of government bonds.”
Fed Chairman Ben S. Bernanke said Jan. 25 that he’s considering additional bond purchases to boost growth, after the central bank’s Federal Open Market Committee extended its rate pledge the same day. The announcements sparked a two-day Treasuries rally.
Inflation Outlook
Policy makers set a long-term goal of 2 percent inflation as measured by the annual change in the price index for personal consumption expenditures. They also forecast that price increases will fall short of the target this year and next.
The price index climbed 2.5 percent for the 12 months ending in November. By contrast, U.S. consumer costs increased at an annual rate of 3 percent in December.
The difference between yields on five-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened one basis point to 1.81 percentage points today, up from 1.55 percent at the end of last year.
Demand for inflation insurance has sent TIPS to a 1.2 percent gain this year, following a 14 percent return in 2011, according to Bank of America Merrill Lynch indexes.
Lacker Dissent
U.S. corporate bonds have returned 1.3 percent in 2012 and 7.5 percent last year, the indexes show. The MSCI All Country World Index (MXWD) of stocks handed investors a 6.5 percent profit this year, including reinvested dividends.
Fed Bank of Richmond President Jeffrey Lacker said today that interest rates may need to rise before late 2014 to prevent an increase in inflation.
“I do not believe economic conditions are likely to warrant an exceptionally low federal funds rate for so long,” Lacker said in a statement on the Richmond Fed’s website explaining his dissent from the central bank’s Jan. 25 decision.
Mizuho Asset Management Co. in Tokyo, which correctly predicted a rally in Treasuries last year, is betting the Fed will implement another round of bond purchases and send long- term yields lower. Yields on 10-year debt will fall to a record 1.5 percent by mid-year, said Hiromasa Nakamura, a senior investor at the company, which oversees the equivalent of $42.7 billion in assets and is a unit of Japan’s second-largest publicly traded bank.
Yield Curve
The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs. It plans to sell as much as $8.75 billion of securities due from March 2014 to January 2015 today under the plan, according to the New York Fed’s website.
It has also purchased $2.3 trillion of debt in two rounds of quantitative easing that ended in June.
Longer-term Treasuries have lagged behind shorter-maturity notes in this week’s rally, widening the difference between five- and 10-year yields to 1.21 percentage points yesterday, the most in almost three months. The spread was 117 basis points today.
Shorter-term Treasuries tend to track what the central bank does with its target for overnight lending, while longer maturities are more influenced by the inflation outlook.
“The mid-2014 language will help the belly,” or the middle part of the spectrum of Treasury maturities, according to a report yesterday by RBC Capital Markets Corp., one of the 21 primary dealers that trade with the Fed. “There is not anything out of the FOMC meeting that is positive for the long end,” said the report by Michael Cloherty, the head of U.S. rates strategy, and Tom Porcelli, the chief U.S. economist, for the company in New York.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net Keith Jenkins in London at kjenkins3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
