BLBG:Treasury Yields Approach 14-Month High on Bets Fed to Reduce QE
Treasury 10-year yields approached a 14-month high before data this week forecast to show employers stepped up hiring, adding to signs of recovery and boosting speculation the Federal Reserve will reduce stimulus.
U.S. companies added more employees last month, ADP Research Institute will say tomorrow, according to a Bloomberg News survey of economists. Two Fed policy makers said the central bank may end its bond purchases, known as quantitative easing, this year, damping the attraction of the assets. Asian and European shares rose. The yield difference, or spread, between 10-year Treasuries and similar-maturity Japanese bonds was five basis points from the most in two months.
“The key driving force for Treasuries has been some reassessment of Fed policy and the stronger probability of at least slower QE,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in Paris. Stock gains “are adding to the tone” in core bond markets including the U.S., he said.
The U.S. 10-year yield climbed one basis point, or 0.01 percentage point, to 2.13 percent at 7:36 a.m. New York time, according to Bloomberg Bond Trader prices. The 1.75 percent security due in May 2023 dropped 3/32, or 94 cents per $1,000 face amount, to 96 19/32.
The 10-year yield climbed to 2.23 percent on May 29, the highest since April 2012. That’s still less than the average of 3.57 percent for the past decade.
Higher Yields
Treasury 10-year yields will probably climb to 2.2 percent by the end of the third quarter and 2.4 percent by year-end, BNP’s Jacq said. Those predictions compare with the 2 percent and 2.20 percent median estimates in Bloomberg surveys of economists and strategists.
The yield difference between 10-year yields in the U.S. and Japan was at 1.25 percentage points, after reaching 1.30 percentage points yesterday, the most since April 4. The spread was as much as 1.4 percentage points in March, the widest since August 2011.
Atlanta Fed President Dennis Lockhart said yesterday he wouldn’t rule out a reduction of asset purchases in the next few months. John Williams of the San Francisco Fed said the purchase program may end this year. Lockhart and Williams don’t vote on the central bank’s policy-setting committee in 2013.
The Fed buys $85 billion of Treasuries and mortgage-backed securities each month to support the economy by putting downward pressure on borrowing costs.
‘Certainly Possible’
The central bank may announce a reduction of its monthly purchases as early as September if employment and inflation strengthen enough, said Jan Hatzius, chief economist at Goldman Sachs Group Inc. (GS)
While Goldman Sachs’s forecast remains for Fed officials to wait until December before slowing monthly asset purchases, Hatzius said yesterday that so-called tapering may occur sooner. “A September tapering is certainly possible, I think that is going to depend on the data,” Hatzius said in a Bloomberg Television interview at Goldman Sachs’s Global Macro Conference in London.
U.S. companies added 165,000 workers in May, after hiring by 119,000 in April, ADP Research Institute will say tomorrow, according to a Bloomberg survey. The unemployment rate held at a four-year low of 7.5 percent, a separate survey showed before the Labor Department data on June 7.
A Fed advisory panel of bankers said last month it expects record accommodation to last from one to three years. An industry report yesterday showed U.S. manufacturing shrank in May at the fastest pace in four years.
Inflation ‘Decreasing’
Inflation is in check, and that will give the Fed time to continue its bond purchases, said Kei Katayama, who buys non-yen debt in Tokyo for Daiwa SB Investments Ltd., which manages the equivalent of $49.5 billion.
“Inflation is clearly decreasing,” Katayama said. “I’m not confident in a shorter duration” debt portfolio, he said.
Duration is a measure of a bond’s sensitivity to changes in interest rates. Katayama said he holds a position that is less than that of the benchmark he uses to gauge performance in case yields rise.
The Fed’s measure of traders’ forecasts for inflation for the period from 2018 to 2023, known as the five-year five-year forward break-even rate, was 2.63 percent as of the latest figure available May 30. That was the lowest in six months and compares to the average of 2.75 percent for the past decade.
To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
