BLBG:Treasuries Head for Steepest Loss in Three Years on Fed Outlook
Treasuries headed for their steepest monthly loss in three years before the U.S. sells $29 billion of seven-year notes as signs the economy is recovering fuels bets the Federal Reserve will end stimulus.
Treasuries tumbled 1.8 percent in May as of yesterday, the most since December 2009, according to Bank of America Merrill Lynch indexes. Goldman Sachs Group Inc. said it’s looking for opportunities to sell Treasuries as the economy expands and inflation accelerates. Fed Chairman Ben S. Bernanke said last week the central bank could cut the pace of debt purchases if officials are confident that the recovery will be sustained.
“There’s somewhat more positive sentiment about the U.S. economy and also on a relative basis compared with Europe,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “That has been driving yields upward. Now we could see some consolidation.”
Ten-year yields were little changed at 2.12 percent as of 6:22 a.m. New York time, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 was at 96 21/32.
The Treasury 10-year yield may drop to 2 percent in the next three months, before climbing to 2.65 percent by year-end, Nordea’s From said.
The median of 75 economists’ and strategists’ predictions compiled by Bloomberg is for the rate to end the year at 2.15 percent.
Steepest Loss
Securities in the Bank of America Merrill Lynch Global Broad Market Index have fallen 1.5 percent in May, poised for the steepest loss since April 2004.
The Fed buys $85 billion of Treasury and mortgage debt a month to support the economy by putting downward pressure on interest rates. Bernanke said last week the Fed could “take a step down in our pace of purchases” in the “next few meetings,” in testimony to lawmakers. Policy makers meet next on June 18-19.
The central bank plans to purchase as much as $1.75 billion of securities maturing between February 2036 and May 2043 today, according to the New York Fed’s website.
U.S. gross domestic product grew 2.5 percent in the first quarter, the same as the government estimated a month ago, and pending home sales rose in April from a year earlier, reports will show today, according to Bloomberg News surveys of economists.
‘Other Opportunities’
Goldman Sachs will “be looking for other opportunities to trade the market from the short side on evidence that the economy is continuing to expand and that inflation is turning upward,” Francesco Garzarelli, co-head of macro and markets research in London, wrote in a client note dated yesterday. A short position is a bet that the price of a security will drop.
That was after the company recommended investors take profit on a tactical short position adopted when the Treasury 10-year yield was at 1.76 percent, he wrote.
The last sale of seven-year notes on April 25 drew bids for 2.71 times the amount of debt available. The average for the past 10 auctions of this maturity is 2.67. The securities being sold today yielded 1.52 percent in pre-auction trading.
A $35-billion sale of five-year notes yesterday attracted the most interest from non-primary dealer investors since at least 2003 as higher yields bolstered demand.
Volatility Climbs
Treasury volatility as measured by the Bank of America Merrill Lynch MOVE index rose to 81.22 yesterday, the highest level in almost a year.
Treasury yields show inflation expectations fell to a nine-month low.
The difference between yields on 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, narrowed to 2.20 percentage points today, the smallest gap since August.
“Treasuries are relatively cheap,” said Kim Youngsung, the head of fixed income in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor with the equivalent of $100 billion in assets. “I don’t think the U.S. is going to have a high inflation rate.”
The Fed’s preferred measure of inflation, the personal consumption expenditures deflator, rose 0.8 percent in April from 12 months earlier, based on a Bloomberg survey of economists before the Commerce Department reports the figure tomorrow. It would be the smallest increase since October 2009.
Personal spending was unchanged in April from March, the report may also show, according to the surveys.
To contact the reporters on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
