BS: Treasury Yields Close to Highest Since April Before Fed
Treasury 10-year note yields traded close to the highest since April on speculation Federal Reserve minutes may provide details on when the central bank plans to start trimming debt purchases.
Benchmark notes declined for a third day as economists said a government report will show residential construction was at almost a four-year high in January, damping appetite for the safest assets. Investors demanded the biggest yield premium in 11 months to buy notes in the U.S. instead of Japan. The difference between 10-year yields in the two nations widened to 1.30 percentage points, the most since March 20.
“The Fed minutes is certainly the primary driver,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia. “We’re looking for the Fed to talk a little bit more about the downsides of their very expansionary monetary policy. The short-term data will take second seat to the Fed.”
The U.S. 10-year yield climbed one basis point, or 0.01 percentage point, to 2.04 percent at 7:51 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 fell 2/32, or 63 cents per $1,000 face amount, to 99 22/32. The yield reached as much as 2.05 percent. It climbed to 2.06 percent on Feb. 14, the highest level since April 10.
Fed Reading
The Fed is scheduled to issue the minutes of its Jan. 29-30 meeting at 2 p.m. in Washington. The U.S. central bank said on Jan. 30 it is committed to buying about $85 billion of government and mortgage securities a month to support growth. Minutes of the Fed’s Dec. 11-12 gathering showed members divided between a mid- or end-of-year finish to bond purchases.
“The current U.S. yield is too low,” said Yoshiyuki Suzuki, head of fixed income in Tokyo at Fukoku Mutual Life Insurance Co., which has about $60.7 billion in assets. “I don’t think the Fed will stop buying bonds this month, but it’s possible this year.”
U.S. builders broke ground on houses at a 920,000 annual rate last month, compared with December’s 954,000 pace that was the fastest since June 2008, according to the median estimate of 85 economists surveyed by Bloomberg before today’s Commerce Department report. Housing permits, a proxy for future construction, probably rose, the figures showed.
Economic Data
Labor Department data on producer prices today and on consumer costs tomorrow will show inflation is in check, according to separate Bloomberg surveys.
The difference between yields on 10-year notes and similar- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.57 percentage points. The average in the past decade is 2.20 percentage points.
Treasuries handed investors a 1 percent loss this year through yesterday while Japan’s government securities gained 0.5 percent, according to Bank of America Merrill Lynch indexes.
The spread between U.S. and Japanese 10-year yields may widen to 1.50 percentage points by the middle of the year, Fukoku’s Suzuki said.
Treasury 10-year yields have risen about 30 basis points this year, while Japan’s are little changed at 0.74 percent. A Bloomberg survey of economists predicts yields will climb to 2.32 percent in the U.S. and to 1.10 percent in Japan by year- end, for a difference of 1.22 percentage points.
Budget Update
U.S. officials will probably avoid $1.2 trillion in automatic budget cuts, allowing the economy to improve, said Allen Lei, a Taipei-based Treasuries trader at Hontai Life Insurance Co., which has $6 billion in fixed-income assets. The reductions, known as sequestration, are scheduled to begin next month if Congress does not act.
President Barack Obama said yesterday the spending reductions may cost the U.S. hundreds of thousands of jobs, military readiness would be damaged, aid to state and local governments would shrink and the government’s ability to respond to natural disasters would be diminished.
“Interest rates are having a hard time declining,” Lei said. “The sequester will be resolved at the end of February. That will be a positive sign” for the economy, he said. Lei said he sold all his Treasuries earlier this month and is waiting for yields to rise before investing again.
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net
