BLBG:Treasuries Fall as Fed Plan Boosts Inflation Indicators
Treasuries declined as inflation expectations surged and stocks rallied following the Federal Reserve’s decision to buy more debt as it strives to spur the U.S. economy.
The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, an indicator of trader expectations for consumer prices over the life of the debt, widened to as much as 2.54 percentage points. It was the most in 16 months and compares with the average of 2.16 percentage points over the past decade. The Fed said yesterday it will purchase $40 billion of mortgage debt a month.
“It’s an open-ended purchase,” said Bin Gao, an interest- rate strategist in Hong Kong at Bank of America Corp., whose Merrill Lynch unit is one of 21 primary dealers required to bid at government debt auctions. “It sends a signal that the Fed will tolerate higher inflation.”
Benchmark 10-year yields increased four basis points, or 0.04 percentage point, to 1.76 percent at 8:09 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 slid 11/32, or $3.44 per $1,000 face amount, to 98 25/32.
The MSCI Asia Pacific Index of equities jumped 2.5 percent to the highest level since May.
Five-year inflation swaps, which allow holders to exchange fixed interest rates for returns equivalent to consumer price increases, show investors expect costs to rise at average annual rate of 2.50 percent through September 2017 yesterday. It was the most since March 14 and compares with the average of 2.07 percentage points over the past five years. It was 2.39 percent today.
Inflation Protection
TIPS have returned 6.2 percent this year, versus 1.7 percent for Treasuries that do not provide inflation protection, according to Bank of America Merrill Lynch indexes. Thirty-year bonds gained 0.9 percent, based on the gauges.
A government report today will probably say U.S. consumer prices rose 0.6 percent in August from July, the most since June 2009, based on a Bloomberg News survey of economists. Retail sales increased and industrial production was unchanged last month, other reports will probably show, based on separate polls.
While inflation expectations are climbing, price increases in the economy are still subdued, said Hiromasa Nakamura, who invests in U.S. debt from Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $41 billion.
The U.S. consumer price index rose 1.4 percent in July from the year before, versus the high over the past 50 years of 14.8 percent in 1980. The figure will rise to 1.7 percent in today’s report, the Bloomberg survey shows.
Accommodative Stance
“The Fed may continue the accommodative stance until the labor market improves substantially,” Nakamura said. “That is positive for U.S. Treasuries.” Mizuho favors the longest maturities, he said, investing in those that stand to gain most if yields fall.
Fed Chairman Ben S. Bernanke is trying to bring down an unemployment rate stuck above 8 percent since February 2009.
“We’re looking for ongoing, sustained improvement in the labor market,” he said at a press conference yesterday in Washington following the conclusion of a two-day meeting of the Federal Open Market Committee.
The FOMC said it would probably hold its target for overnight bank lending near zero “at least through mid-2015.”
The Fed also said it will maintain its current program of swapping shorter-term Treasuries in its holdings with those due in 6 to 30 years to put downward pressure on long-term borrowing costs.
The central bank is scheduled to buy as much as $2 billion of debt maturing from February 2036 to August 2042 today as part of the plan, according to Fed Bank of New York’s website.
To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net Wes Goodman in Singapore at wgoodman@bloomberg.net;
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
