BLBG:Two-Year Treasury Yields Reach Highest in Seven Months Before Retail Sales
Treasury (YCGT0025) two-year note yields climbed to a seven-month high before a U.S. report that economists said will show retail sales increased in February, reducing the case for further easing by the central bank.
Ten-year notes were lower for a fifth day before the Treasury sells $21 billion of the securities today, part of the $66 billion in coupon-bearing debt being auctioned this week. The Federal Reserve meets to review monetary policy today as a Bloomberg survey showed the best six months of job gains since 2006 have helped reduce the odds of a third round of asset purchases this year.
“The economic data are somewhat better, so there is no reason to think that the Fed will take additional steps now,” said Piet Lammens, Brussels-based head of research at KBC Bank NV. “We would expect some downward pressure on Treasuries, because yields are very low, but because the outlook for monetary policy is very accommodative, there’s a limit on how much yields can rise.”
The yield on the two-year note climbed less than a basis point to 0.33 percent at 9:50 a.m. in London, the highest level since Aug. 4. The 0.25 percent security maturing in February 2014 was little changed at 99 27/32, according to Bloomberg Bond Trader prices.
The benchmark 10-year yield rose one basis point, or 0.01 percentage point, to 2.04 percent, having increased nine basis points over the previous four trading days.
Retail sales advanced 1.1 percent last month, the biggest increase since September, according to a Bloomberg News survey before today’s Commerce Department report. Sales gained 0.4 percent in January.
Fed Meeting
Fed Chairman Ben S. Bernanke said on Jan. 25 after the central bank’s previous meeting that policy makers were considering additional asset purchases to boost growth. The central bank also extended a pledge to keep the benchmark interest rate at almost zero through at least late 2014. The Fed bought $2.3 trillion of securities in two rounds of quantitative easing from December 2008 to June 2011.
“A large-scale expansion of quantitative easing is much less likely,” said Hitoshi Asaoka, a senior strategist in Tokyo at Mizuho Trust & Banking Co., a unit of Japan’s third-largest listed bank by market value. The increase in yields “results from strong U.S. economic data.”
Sixty-one percent of respondents in a March 9-12 Bloomberg survey said Bernanke will refrain from any action to expand the Fed’s $2.89 trillion balance sheet this year. In January, 50 percent of those surveyed predicted more bond buying. The Federal Open Market Committee will release its statement at about 2:15 p.m. after meeting in Washington.
European Cuts
The decline in Treasuries was tempered amid speculation spending cuts by European governments will impair a recovery in the region’s economy, boosting demand for safer assets.
Euro-area finance ministers said after a meeting yesterday that Spain should consider additional austerity measures to cut its deficit and meet budget targets. They also signed off on a second Greek bailout fund after the nation led its creditors into the biggest restructuring of sovereign debt in history.
“The situation in Europe has been improving lately, but their fiscal problems have yet to be resolved,” said Shinichiro Kadota, who covers non-yen bonds as a strategist at Barclays Capital in Tokyo. “Demand for Treasuries will remain resilient in a flight to quality from Europe’s problems.”
Ten-Year Sale
The 10-year notes being sold today yielded 2.05 percent in pre-auction trading, versus 2.02 percent at the previous auction of the securities on Feb. 8. The U.S. will sell $13 billion of 30-year bonds tomorrow.
Demand was lower-than-forecast at yesterday’s $32 billion sale of three-year notes. Indirect bidders, an investor class that includes foreign central banks, purchased 34.6 percent of the notes, compared with an average of 36.8 percent during the past 10 sales.
Treasury 10-year yields will climb to 2.54 percent by year- end, according to a Bloomberg survey with the most recent forecasts given the heaviest weighting. The yield has been in a range of 1.79 percent to 2.09 percent this year.
Investors expect prices in the economy to rise 2.31 percent a year over the next 10 years, as measured by the spread between Treasury Inflation Protected Securities (USGGBE10) and nominal bonds. That’s up from a 2011 low of 1.67 percent reached on Sept. 23.
Bank of America Merrill Lynch’s MOVE index, which measures price swings based on options, dropped to 69.9 yesterday, the lowest level since July 2007. The gauge was as high as 117.8 on Aug. 8.
To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net
To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net
