BLBG:Treasuries Extend Biggest Weekly Drop in 8 Months Amid Growth
Treasury (YCGT0025) 10-year notes extended their biggest weekly drop in eight months before U.S. reports that economists said will show consumer prices and factory output rose last month, damping demand for the safest assets.
Thirty-year yields approached the highest level since September as a gauge of the inflation outlook climbed for an eighth day, reducing the appeal of the fixed income from bonds. Ten-year notes dropped for an eighth session as Federal Reserve Bank of Richmond President Jeffrey Lacker said the U.S. central bank will probably need to raise interest rates next year to contain inflation. The Fed boosted its economic outlook this week, sparking a global selloff in government bonds.
“If we see industrial production above expectations then that could add to the positive market sentiment” and be negative for Treasuries, said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “A combination of a series of quite good economic data and the Fed’s statement has caused Treasury yields to break out of their range and increase this week.”
The 10-year yield rose three basis points, or 0.03 percentage point, to 2.31 percent, at 6:05 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due February 2022 dropped 7/32, or $2.19 per $1,000 face amount, to 97 9/32. The yield rose 28 basis points this week, the most since the period ended July 1.
Below Average
Yields may increase another 10 to 15 basis points in the next two weeks, Purps said. While the 10-year rate has climbed 43 basis points this year it is still below last year’s high of 3.77 percent set on Feb. 9, and the average over the past 10 years of 3.87 percent.
Thirty-year yields rose three basis points to 3.44 percent after rising to 3.49 percent yesterday, the most since Sept. 2.
Government bonds fell around the world, with German 10-year bunds heading for their biggest weekly decline since November and U.K. 10-year gilts dropping for a fourth day.
“My current assessment is that an increase in interest rates is likely to be necessary some time in 2013,” Lacker said in a statement on the Richmond Fed’s website. “As the expansion continues, the federal funds rate will need to rise in order to prevent the emergence of inflationary pressures.”
‘Clear Break’
Ten-year yields rose as high as 2.346 percent yesterday, the most since Oct. 28. The advance has broken a downtrend line drawn from the April high of 3.6132 percent which approached the 2 percent mark today, said Andy Cossor, chief market strategist for Asia at DZ Bank AG in Hong Kong.
“We have a clear break of that downtrend line that’s been in place for a long time and we’ve also punched through the resistance that had been keeping the market in a sideways range,” Cossor said. “The upside target, at least initially, will be the highs from October last year at 2.42 percent.”
The advance in Treasury yields probably will be limited, with rates settling into a range, Jamie Searle, a fixed-income strategist at Citigroup Inc. in London, wrote in a client note.
“Yields are only likely to trend higher, in our view, when there are signs that central banks are much closer to reversing policy,” he wrote. “We are still some time away from that in our view. In the meantime, abundant liquidity is likely to continue to support a range of all asset prices.”
While Fed policy makers refrained at their March 13 meeting from new actions to lower borrowing costs and said the U.S. labor market is gathering strength, they also reiterated a pledge to keep the benchmark interest rate at almost zero through at least late 2014.
‘Yields to Rise’
“Amid strong U.S. economic indicators, market speculation over another round of quantitative easing is weakening, which results in higher yields,” said Tomohisa Fujiki, a rates strategist in Tokyo at a unit of BNP Paribas SA, one of 21 primary dealers that trade directly with the Fed. “Looking ahead to the year-end, we expect yields to rise.”
The central bank bought $2.3 trillion of securities in two rounds of so-called quantitative easing from December 2008 to June 2011 in a bid to boost the economy. The Fed is scheduled to sell as much as $8.75 billion of Treasuries due in February 2014 to May 2014 today as part of its program to replace holdings of shorter-term securities with longer-term bonds.
Volatility Falls
Volatility in the Treasury market fell from a two-month high. Bank of America Merrill Lynch’s MOVE Index (MOVE), which measures price swings based on options, declined to 83.4 basis points yesterday after reaching 89.7 basis points on March 14, the highest since Jan. 3.
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, climbed one basis point to 2.4 percentage points after reaching 2.41 percentage points, the most since Aug. 2.
The consumer-price index rose 0.4 percent in February, the most in 10 months, according to a Bloomberg News survey before today’s report. Economists forecast industrial production gained 0.4 percent in February, after being unchanged the previous month, a separate Bloomberg survey showed.
China, the largest foreign U.S. creditor, boosted its holdings of Treasuries in January for the first time in six months as European leaders struggled to contain the region’s sovereign-debt crisis.
Holdings rose by 0.7 percent to $1.16 trillion, the first increase since July, Treasury data released March 14 show. The report also showed net foreign purchases of Treasuries totaled almost $83 billion in January, compared with net selling of $14.9 billion the month before.
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
