BLBG:Treasuries Rise Before Fed Minutes, Yield Drops From 2-Year High
Treasuries rose for the first time in four days before the Federal Reserve publishes minutes of its July meeting tomorrow amid speculation the central bank will provide guidance on when it plans to withdraw stimulus.
Ten-year yields dropped from the highest level in more than two years after a technical indicator used by some traders suggested a reversal was imminent. Yields have jumped more than 20 basis points this month on speculation the economy is strong enough to prompt the central bank to slow stimulus as soon as its September meeting. The Fed’s first step may be reduce debt purchases next month by $10 billion to a $75 billion pace, according to a Bloomberg survey concluded last week.
“We’re now waiting for the Fed minutes for clues as to what is standing in the way of tapering,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “There’s a little step back in yields. It’s certainly not a done deal that tapering will start in September.”
The U.S. 10-year yield fell six basis points, or 0.06 percentage point, to 2.82 percent at 7:08 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.5 percent note due in August 2023 rose 18/32, or $5.63 per $1,000 face amount, to 97 1/4. The yield climbed to 2.90 percent yesterday, the highest level since July 2011.
Volatility as measured by the Merrill Lynch Option Volatility Estimate MOVE Index increased to 99.48 yesterday, the most since July 9. The average for 2013 is 68.15.
End Purchases
Fed policy makers led by Chairman Ben S. Bernanke are contemplating how to end a third round of quantitative easing that has swelled the Fed’s balance sheet to a record $3.65 trillion. The central bank will end purchases in mid-2014, according to the median estimate in a Bloomberg survey of 48 economists conducted Aug. 9-13. The Fed next meets Sept. 17-18.
The larger the Fed’s balance sheet is, when it comes time to raise rates, the greater are the risks of the central bank “getting it wrong,” Richmond Fed President Jeffrey Lacker told the Richmond Times-Dispatch newspaper in an interview published on Aug. 18.
Benefits of more purchases “are likely to be negligible,” Lacker said in the interview conducted last week. The Fed faces the risk of “getting the exit process wrong and letting inflation overheat and rise too much.”
Relative Strength
An indicator of momentum used by some dealers signaled that Treasuries are oversold. The 14-day relative-strength index for the 10-year yield rose above the 70 threshold yesterday that indicates it has climbed too much. The last time it exceeded that level was July 5, which was followed by a two-week rally.
“Yields are reaching levels that can’t be justified unless an earlier hike in interest rates is seen in the U.S.,” said Hitoshi Asaoka, a senior strategist at Mizuho Trust & Banking Co. in Tokyo. “Because inflation rates are very low, I can’t see a need for an earlier rate hike.”
The Fed has kept its target for overnight lending between banks in a range of zero to 0.25 percent since December 2008. Investors see a 53 percent chance policy makers will raise the so-called federal funds rate to 0.5 percent or more by January 2015, data compiled by Bloomberg from futures show.
Policy makers repeated in a July statement that the current range will be appropriate at least as long as the unemployment rate is above 6.5 percent and inflation between one and two years ahead is projected to be no more than a half percentage point above the bank’s 2 percent target.
Jobless Rate
The jobless rate was 7.4 percent as of July. The Fed’s preferred inflation gauge showed prices rising 1.3 percent in the 12 months through June.
Ten-year yields will rise above 3 percent as the Fed trims back its debt-purchase program, according to Rick Rieder at BlackRock Inc., the world’s biggest money manager with $3.86 trillion in assets.
“It has created this tremendous distortion in interest rates,” said Rieder, who is chief investment officer for fundamental fixed-income in New York. “Most of the losses have come because the distortion is coming out. We think you are going to have moderately negative returns in bond funds, certainly this year into next,” he said yesterday on Bloomberg Television’s “Surveillance” program.
Fair value for 10-year yields is about 3 percent to 3.25 percent, he said.
The 10-year rate will end the year at 2.73 percent, according to a Bloomberg survey of 65 analysts with the most recent forecasts given the heaviest weighting. The yield will rise to 3.01 percent in the second quarter of next year, a separate survey shows.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net
