BLBG:Treasuries Set for First Weekly Gain Since April Amid Fed Bets
Treasuries were poised for their first weekly gain since April as some investors said speculation was overblown the Federal Reserve could soon disclose plans to slow its bond-buying program.
Ten-year yields reached 14-month highs this week as investors weighed whether the economy is strengthening enough for policy makers to consider reducing bond purchases that seek to curb borrowing rates. Fed Chairman Ben S. Bernanke has said repeatedly a reduction wouldn’t mean an end to record easing.
“I’m not too concerned about tapering,” said Hideo Shimomura, who helps oversee the equivalent of $63 billion in Tokyo as the chief fund investor at Mitsubishi UFJ Asset Management Co. “They’re still expanding their balance sheet. The reality is that the Fed cannot hike rates for several years. U.S. Treasuries could rally.”
U.S. 10-year yields were unchanged at 2.15 percent as of 6:50 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due in May 2023 was 96 14/32.
The yield dropped two basis points, or 0.02 percentage point, from the end of last week. It was as high as 2.29 percent on June 11, a level not seen since April 2012.
Japan’s 10-year yield slid three basis points today to 0.825 percent. It fell from 0.86 percent at the end of last week, heading for the first five-day decline since the period ended May 3. A basis point is 0.01 percentage point.
Highly Accommodative
In testimony to the Joint Economic Committee on May 22, Bernanke said the Fed “expects a highly accommodative stance of monetary policy to remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens.”
Changing the flow of purchases does not necessarily yield a smaller central bank balance sheet, Boston Fed President Eric Rosengren said in a May 29 speech. “Even if we were to adjust the rate of monthly purchases, the ultimate size of the Fed’s balance sheet would depend on the point of cessation.”
The central bank through its purchases, known as quantitative easing, has increased its assets to $3.4 trillion. It is currently buying $85 billion of Treasury and mortgage debt a month, and has kept the target for overnight lending between banks at almost zero since December 2008.
Fed tapering will send yields higher, said Kazuyuki Takigawa, who oversees $6 billion of non-yen bonds at Resona Bank Ltd. in Tokyo.
Healthier Economy
“The U.S. economy is healthier than before,” Takigawa said. “The Fed seems to be ready to taper QE before the end of the year. That combination will lead to gradually higher rates in the U.S.”
The central bank will reduce purchases to $65 billion a month at its Oct. 29-30 meeting, according to the median estimate in a Bloomberg survey of 59 economists.
Ten-year yields will rise to 2.33 percent by Dec. 31, based on a separate Bloomberg News survey conducted June 7 to June 12. Takigawa predicts 2.5 percent.
Demand fell at Treasury auctions of $66 billion of 3-, 10-and 30-year debt this week following a report this month that showed jobs growth is quickening.
Investors placed $2.96 of offers for each dollar of debt sold this year at the U.S. government’s $971 billion in auctions of Treasury notes and bonds, compared with a record bid-to-cover ratio of $3.15 in 2012, Treasury data compiled by Bloomberg show.
Credit Rating
Standard & Poor’s boosted its outlook for the U.S.’s AA+ grade earlier this week to “stable” from “negative,” while Moody’s Investors Service has said it’s awaiting lawmakers’ budget decisions this year as it weighs reducing America’s Aaa. Fitch Ratings, which has a “negative” outlook on the U.S., said earlier this year that the debt trajectory isn’t consistent with a AAA borrower.
Manufacturing slowed in May, while service industries, jobs and retail sales improved, according to data this month.
Reports today will probably show producer prices and industrial production rose, while consumer confidence held unchanged, based on Bloomberg surveys of economists. The Treasury Department is scheduled to report on international demand for U.S. bonds, stocks and other financial assets for April.
To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net
