BLBG:Treasuries Fall for a Third Day on Outlook for China, U.S. Manufacturing
Treasuries dropped for a third day after China’s manufacturing improved and economists said U.S. reports today will show growth at factories accelerated.
Corporate bonds beat Treasuries in February as the U.S. economy showed signs of improving. An index of sovereign securities returned 0.7 percent since the end of November, versus 5.6 percent for investment-grade and high-yield company debt, Bank of America data show. Federal Reserve Chairman Ben S. Bernanke yesterday damped speculation the central bank will boost stimulus. Italy’s Prime Minister Mario Monti signaled the worst may be over for the euro-area’s most distressed bonds.
“The macro data look more encouraging, even Bernanke recognized that during his testimony, so there’s certainly domestic factors that seem to be favorable to higher yields in the U.S.,” said Orlando Green, a London-based fixed-income strategist at Credit Agricole Corporate & Investment Bank. “The European situation could help see yields rise but we need more clarity.”
The benchmark 10-year yield climbed three basis points, or 0.03 percentage point, to 2 percent at 10:49 a.m. London time, according to Bloomberg Bond Trader prices. The 2 percent note maturing in February 2022 fell 9/32, or $2.81 per $1,000 face amount, to 99 30/32.
China Growth
China’s purchasing managers’ index rose to 51 in February from 50.5 in January, the statistics bureau and logistics federation said. The Institute for Supply Management’s index of U.S. factory activity climbed to an eight-month high of 54.5 in February, according to a Bloomberg survey. Consumer purchases rose 0.4 percent in January, the most in four months, a separate survey showed before the Commerce Department data today.
Italy’s Monti said he expects European leaders to reach agreement by the end of the month on expanding a debt-crisis firewall. He said yesterday he’s “confident” a deal on boosting the size of Europe’s bailout fund will be reached at a European Union summit in Brussels beginning today, even though German Chancellor Angela Merkel has expressed reluctance to discuss the issue.
The European Central Bank yesterday allotted 529.5 billion euros of three-year loans under its longer-term refinancing operation, boosting demand for higher-yielding assets.
Treasuries fell yesterday as Bernanke’s comments to lawmakers damped the expectations of some investors that the Fed will expand its economic stimulus through a third round of debt purchases. The Fed chairman said inflation will probably “remain subdued.”
Bond Buying
The central bank’s bond-buying program, combined with demand for the relative safety of U.S. government debt spurred by Europe’s fiscal crisis, is keeping 10-year yields about 33 basis points of the record low.
The Fed is replacing $400 billion of shorter-dated Treasuries in its holdings with longer-term debt to cap long- term borrowing costs. The central bank is scheduled to sell as much as $8.75 billion of notes maturing from June 2012 to January 2013 today.
While the U.S. jobless rate has fallen to the least since February 2009, some investors are focused on Greece’s struggle to avoid default, oil costs that have risen above $100 a barrel and declining home prices.
“There are enough worries out there globally and that will give an underlying bid to the Treasury market,” said Russell Jones, the Sydney-based global head of debt strategy at Westpac Banking Corp. (WBC), Australia’s second-largest lender.
Ten-year Treasury yields will drop to a record 1.5 percent over the next three months, he said.
Personal Consumption
Fed policy makers have a target of 2 percent for cost increases in the economy, based on the personal consumption expenditures index.
The gauge rose 2.3 percent in the 12 months ending Jan. 31, slowing from 2.4 percent in the year ended Dec. 31, according to the median forecast of economists surveyed by Bloomberg before the government report today. The measure increased 1.8 percent after taking out food and energy costs, unchanged from December’s rate, a separate survey showed.
A gauge of trader expectations for inflation that is tracked by the Fed is at 2.42 percent, compared with this year’s high of 2.6 percent. The five-year, five-year forward break-even rate, which projects annualized price increases over a five-year period starting in 2017, is below its 2.78 percent average over the past decade.
The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, was 2.27 percentage points. The decade-long average is 2.14 percentage points.
Five-year inflation swaps, which allow investors to exchange fixed-interest rates for returns equivalent to the consumer price index, fell to 2.39 percent from 2.49 a week ago.
The economy will improve and may prompt policy makers to raise the benchmark rate “sooner than people expect,” Fed Bank of Philadelphia President Charles Plosser said yesterday.
To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
