BLBG:Treasuries Are Little Changed as Investors Weigh Fed Prospects
Treasuries were little changed as investors weighed whether the U.S. economy is strong enough for the Federal Reserve to reduce its quantitative-easing stimulus designed to hold down borrowing costs.
Ten-year note yields last week climbed to a 14-month high amid skepticism the Fed would slow its bond-buying program imminently. The International Monetary Fund urged the central bank to carefully manage its exit plan to avoid disrupting financial markets and lowered its 2014 growth prediction for the world’s largest economy. Fed Chairman Ben S. Bernanke and the policy-setting Federal Open Market Committee start a two-day meeting tomorrow.
“The recent rise in yields suggested the market was nervous that the Fed will soon reduce stimulus, and the central bank has room to calm the market down this week,” said Padhraic Garvey, the head of developed markets debt strategy at ING Groep NV in Amsterdam. “We expect Bernanke to be dovish and tell the market that the tapering will happen at some point, but it’s not imminent. Treasuries are likely to move in a narrow range into the meeting.”
U.S. 10-year yields were at 2.13 percent as of 9:49 a.m. London time, after falling 10 basis points in the previous two sessions, according to Bloomberg Bond Trader data. The price of the 1.75 percent note due May 2023 was at 96 21/32.
The benchmark yield climbed to 2.29 percent on June 11, the highest since April 2012, after reaching a low this year of 1.61 percent on May 1.
Rising Yields
Volatility in Treasuries as measured by the Bank of America Merrill Lynch MOVE Index ended last week at 78.45. It rose to 84.75 on June 6 and June 10, the most since June 2012. It averaged 62 over the past 12 months.
The yield on 10-year Treasuries will rise by more than 50 basis points between now and the end of the year, according to Societe Generale S/A.
“Bernanke will have to sit on the fence and I wouldn’t expect a clear message,” said Patrick Legland, Paris-based head of research at Societe Generale SA, said in an interview on Bloomberg Television’s ‘On the Move’ with Manus Cranny. “We are on the road for 2.75 percent 10-year yields on Treasuries by year-end.”
The Washington-based IMF left its U.S. growth forecast for this year unchanged at 1.9 percent, and cut its prediction for 2014 to 2.7 percent, from 3 percent growth predicted in April.
‘Exit Strategy’
“Effective communication on the exit strategy and a careful calibration of its timing will be critical for reducing the risk of abrupt and sustained moves in long-term interest rates and excessive interest-rate volatility as the exit nears,” the IMF said about Fed stimulus measures in a statement released June 14.
The Fed Bank of New York’s general economic index rose to zero this month from minus 1.4 in May, according to the median estimate of economists surveyed by Bloomberg News before the data today. Readings less than zero signal contraction in New York, northern New Jersey and southern Connecticut.
The Fed is buying $85 billion of Treasuries and mortgage securities a month to spur the economy, and has kept the target for overnight lending between banks at almost zero since December 2008. The central bank will purchase as much as $5.75 billion today in securities due March 2018 to February 2019, according to the New York Fed’s website.
“Intermediate Treasuries are currently attractively priced at around 2 percent,” Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said on the company’s website last week. “Mild” tapering by Fed is possible by year’s end, he also said on the website.
Treasury Flows
Foreign sales of U.S. long-term securities outpaced U.S. purchases of such assets abroad in April as private investors overseas sold a record amount of Treasury bonds and notes, a government report showed last week.
The net long-term portfolio investment outflow for the month was $37.3 billion after a revised decline of $13.4 billion the prior month, the Treasury Department said in a statement on June 14. U.S. residents bought a net $12.6 billion in foreign long-term securities, while investors abroad were net sellers of $24.8 billion of U.S. long-term securities, the report showed.
Treasuries have fallen 1 percent this year through June 14, according to the Bloomberg U.S. Treasury Bond Index. (BUSY) Japanese government bonds have returned 0.4 percent in the same period, according to Bloomberg data.
“JGBs and Treasuries offer pretty good value here because I’m imagining that there will be more money flowing back into safer assets,” Fred Goodwin, a strategist at State Street Corp. (STT), told reporters in Sydney. “U.S. growth data looks weaker and that volatility is structurally moving higher due to a range of uncertainties. The U.S. is going to have a recession in 2014.”
To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Mariko Ishikawa in Tokyo at mishikawa9@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
