BLBG:Treasuries Set for Fourth Weekly Drop Before Durable Goods Data
Treasuries headed for a fourth weekly decline before a government report that economists said will show durable goods orders rose in April, backing the case for the Federal Reserve to slow the pace of bond buying.
Benchmark 10-year yields climbed to the highest level since March yesterday and volatility increased to the most in six months after Fed Chairman Ben S. Bernanke said the central bank may cut the pace of asset purchases if policy makers see indications of sustained growth. A report showed German business confidence increased in May, damping demand for the perceived safety of government debt. The Standard & Poor’s 500 Index (SPX) has fallen for two days after rising to a record this week.
“The Fed have made it very clear that their monetary policy is data dependent, so sensitivity to data will be even greater than normal,” said Peter Chatwell, a senior fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The selloff in Treasuries is to be expected when equity markets are reaching new highs but undoubtedly the move was multiplied by Bernanke’s comments.”
The 10-year yield was little changed at 2.01 percent as of 7 a.m. in New York after rising to 2.07 percent yesterday, the highest since March 14. The price of the 1.75 percent note due in May 2023 was at 97 5/8. The rate has climbed six basis points, or 0.06 percentage point, this week.
Orders (DGNOCHNG) for durable goods, those meant to last at least three years, increased 1.5 percent from the previous month when they fell 6.9 percent, according to a Bloomberg News survey before the Commerce Department releases the report at 8:30 a.m. in Washington.
Treasuries ‘Expensive’
“Treasuries are expensive,” said Kim Youngsung, head of fixed-income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor with the equivalent of $102.6 billion in assets. “The Fed will closely watch economic data. If the data is good, Bernanke will decrease or stop bond buying around October and that will push” up 10-year yields toward 2.5 percent, he said.
Bernanke said in testimony to the U.S. Congress on May 22 that the central bank may reduce its stimulus at some point. “If we see continued improvement, and we have confidence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases,” he said.
Treasury volatility as measured by Bank of America Merrill Lynch’s MOVE index increased to 68.22 yesterday, the highest level since Nov. 6.
‘Closely Scrutinized’
“Volatility will rise going forward as the focus is increasingly more on the Fed’s exit strategies,” Lloyds Banking Group Plc fixed-income strategists led by Charles Diebel in London wrote in a note to clients. “The next Treasury movements will clearly be defined by data releases. Durable goods later today will be more closely scrutinized than usual.”
Treasuries have handed investors a loss of 1.4 percent this month through yesterday, according to indexes compiled by Bank of America Merrill Lynch. German bunds dropped 1.1 percent.
Business confidence in Germany climbed in May, adding to signs that growth in Europe’s largest economy is gathering pace. The Ifo institute’s business climate index, based on a survey of 7,000 executives, rose to 105.7 from 104.4 in April. Analysts predicted sentiment would remain unchanged, according to the median of 44 forecasts in a Bloomberg News survey.
TIPS Sale
Treasury Inflation Protected Securities rose yesterday after non-primary dealers bought about 69 percent of the $13 billion of the securities issued. The government’s offering of the notes drew a high yield of minus 0.225 percent, compared with minus 0.602 percent at the March 21 offering, the biggest jump since the January 2011 sale of the maturity. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.52.
The yield on current 10-year TIPS was little changed at minus 0.27 percent after dropping two basis points yesterday.
Indirect bidders, a class of investors that includes foreign central banks, bought 56.8 percent of the 10-year TIPS auctioned yesterday, the highest level since November 2010. They purchased 51.3 percent at the March sale. The average for the past 10 offerings is 44.5 percent.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
