BLBG: Treasury Yield at Highest Since June Before Services Figure
By Wes Goodman
April 5 (Bloomberg) -- Treasury yields were at the highest level since June, after the biggest two-week rout in prices this year, as economists said a report today will show U.S. services industries are growing as the job market improves.
Traders added to bets the Federal Reserve will raise interest rates as the fastest employment growth in three years indicates companies are gaining confidence. The U.S. is scheduled to sell $8 billion of 10-year Treasury Inflation- Protected Securities today, the first of four auctions this week totaling $82 billion. A three-year sale tomorrow will be for a record-matching $40 billion.
“Treasury rates will soar,” said Kazuhito Miyabe, who helps oversee $12 billion as head of foreign fixed income in Tokyo at Toyota Asset Management Co., a unit of the world’s largest automaker. “Many investors may sell.”
The 10-year note yielded 3.95 percent as of 12:38 p.m. in Tokyo, matching the highest level since June 11, according to data compiled by Bloomberg. The 3.625 percent security due in February 2020 traded at 97 13/32.
Ten-year rates surged a quarter percentage point over the previous two weeks, the most since the period ended Jan. 1. They will climb to 4.20 percent by June 30, Miyabe said.
Barclays Capital raised its forecasts for the dollar against the yen, citing higher U.S. yields, in a report today. The dollar will rise to 95 yen in one month, 96 in three months and 98 in six months, Barclays said in an e-mailed statement. The estimates before were 91, 93 and 96.
The greenback strengthened to as much as 94.79 yen today, a seven-month high.
Investors earn 2.59 percentage points by choosing 10-year Treasuries over same-maturity Japanese bonds, the biggest spread since the end of 2007.
Geithner on China
Treasury Secretary Timothy F. Geithner is delaying a report on global currency policies, a move that may curb Chinese demand for Treasuries.
Geithner is betting diplomacy will work better than U.S. pressure to get China to strengthen the yuan. In an April 3 statement, he announced the delay of the report, scheduled for April 15, and urged China to move toward a more flexible currency.
China’s policy of keeping the yuan at about 6.83 to the dollar has contributed to a rise in the country’s reserves to $2.4 trillion, the world’s largest. That, in turn, has enabled China to become the largest foreign holder of U.S. Treasuries, with a total of $889 billion in January.
The move will give China space to relax currency controls “without looking like they’re kowtowing to U.S. pressure,” said David Gilmore, a partner at Foreign Exchange Analytics in Essex, Connecticut.
U.S. Outlook
The U.S. economy is improving, White House economic adviser Lawrence Summers and former Fed Chairman Alan Greenspan both said yesterday on ABC’s “This Week” program.
U.S. 10-year yields increased eight basis points, or 0.08 percentage point, on April 2 after the Labor Department reported U.S. companies added 162,000 workers in March, after a loss of 36,000 in February.
The Institute for Supply Management’s index of non- manufacturing businesses, which make up about 90 percent of the economy, will show the fastest growth since 2007, according to a Bloomberg News survey. A separate report today may show fewer Americans signed contracts to buy previously owned homes in February, indicating real estate is struggling to recover.
Futures on the CME Group Inc. exchange show a 60 percent chance the Fed will increase the target for overnight lending between banks by at least a quarter percentage point by November, compared with 45 percent odds a month ago.
Discount Rate
The Fed Board of Governors will probably raise the discount rate to 1 percent from 0.75 percent at a meeting today, Andy Brenner, the global head of emerging market fixed income at New-York based brokerage Guggenheim Capital Markets, wrote in a note to clients.
The board increased the rate, charged to banks for direct loans, by a quarter percentage point to 0.75 percent on Feb. 18. It said the move would encourage financial institutions to rely more on money markets rather than the central bank for short- term liquidity needs.
Ten-year TIPS yielded 1.62 percent, rising from 1.43 percent at the previous auction of the securities on Jan. 11.
Investors bid for 2.65 times the amount of debt on offer at that sale, versus the average of 2.31 times at the past 10 auctions. Indirect bidders, which include foreign central banks, purchased 40.7 percent of the securities, versus the 10-sale average of 39 percent.
TIPS about broke even in March, while conventional Treasuries handed investors a 0.9 percent loss, according to indexes compiled by Bank of America Corp’s Merrill Lynch unit.
The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices, narrowed to 2.26 percentage points from this year’s high of 2.49 percentage points on Jan. 11. The spread is still above the five-year average of 2.15 percentage points.
To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.
